OECD sees Spanish economy in slump for next two years

The OECD on Tuesday predicted more pain for Spain over the next two years when the economy will remain mired in recession with a quarter of the population out of work.

The Paris-based organization also forecast the government would miss its deficit-reduction targets, with the shortfall coming in at 5.4 percent of GDP this year instead of 5.3 percent and at 3.3 percent the following year when the administration of Prime Minister Mariano Rajoy was hoping to bring it back within the European Union ceiling of 3 percent of GDP.

In its latest Economic Outlook, the OECD estimates GDP will shrink 1.6 percent this year and 0.8 percent the next with the jobless rate rising from 24.5 percent to 25.3 percent in 2013. The agency, however, predicted that the drastic overhaul of the laws governing the labor market making it easier and cheaper to sack workers should help boost employment in the medium term.

In the meantime, high unemployment is expected to depress private consumption, with spending estimated to contract 2.9 percent this year and 0.8 percent the following year.

The OECD said it also expects that fiscal consolidation and deleveraging by the private sector will weigh on domestic demand, which is expected to shrink 5.2 percent this year and 2.5 percent the following.

One bright spot in the scenario for Spain is expanding world trade, which, with increased competitiveness, should boost the country’s export growth.

However, the OECD warned that any further increase in Spanish government bond yields as a result of the euro crisis would raise private-sector borrowing costs and deepen the recession.

To tame the deficit, the OECD said the Spanish government needs to introduce medium-term measures such as higher value-added tax rates, and more environment taxes, as well as permanent controls on the regions’ finances.

Spain’s predicted performance will leave it well behind the OECD bloc, where economic growth is expected to slow slightly to 1.6 percent from 1.8 percent last year before picking up the pace again to 2.2 percent in 2013.

“With slow growth, high unemployment and limited room for maneuver regarding macroeconomic policy space, structural reforms are the short-term remedy to spur growth and boost confidence,” the OECD’s secretary general, Ángel Gurría, said at a presentation of the report.

OECD’s chief economist Pier Carlo Padoan warned that the euro crisis remains the “single biggest downside risk” facing the global economy.

On Portugal, one of the bailout casualties of the crisis along with Ireland and Greece, the OECD predicted its economy would remain in recession to mid-2013 as the government continues to tighten its belt to tame its deficit. GDP is expected to shrink 3.2 percent this year and 0.9 percent the next.

Unemployment is predicted to hit 16.2 percent in 2013, up from 15.4 percent this year. “To foster employment and productivity growth, shift resources to traded goods production and ensure international competitiveness, it is critical that the authorities persevere with structural reforms in labor and product markets, the report said.