EC estimates Spain’s deficit hit 10.2 percent of GDP last year with bank aid

The European Commission on Friday estimated Spain’s public deficit swelled to 10.2 percent of GDP if the around 40-billion-euro bailout to recapitalize the country’s banks is included in the calculation. Factoring out the impact of the bailout, it indicated the shortfall in the government’s books would rise in 2014 in the absence of further budget measures.

In its winter forecasts, Brussels painted a dismal picture for Spaniards already suffering the double whammy of recession and austerity, discrediting the government’s estimates for economic growth and unemployment over the course of this year and the next along the way.

Excluding the aid to the banking sector from the deficit last year, the Commission estimated the deficit narrowed to about seven percent of GDP from 8.9 percent in 2011, implying that the bailout added 3.2 percentage points to the shortfall. In the State of the Nation debate on Wednesday, Prime Minister Mariano Rajoy estimated the deficit for last year came in below seven percent. “Spain already has its head above water,” the Popular Party leader affirmed.

Brussels forecast the deficit would decline further this year to 6.7 percent of GDP, with strong value-added tax receipts in the wake of the hikes introduced at the start of September last year and increased cost controls offsetting the impact of the ongoing recession.

However, the Commission predicted that the shortfall in the government’s finances would rise again to 7.2 percent of GDP “on a no-policy-change assumption” as temporary fiscal measures introduced in 2012 expire. This implies the government will have no other option but to impose further austerity on a large swathe of the population already stretched in making ends meet.

As he had already indicated, the EU commissioner for economic and monetary affairs, Olli Rehn, told a news conference on Friday that if the economic figures for 2012 demonstrate sufficient effort on the part of the Rajoy administration in reining in the country’s structural deficit – discounting the impact of the economic cycle – Spain could be afforded more time to bring its shortfall back within the EU ceiling of GDP of three percent. Currently, Spain is committed to doing so in 2014.

Rehn said it was “absolutely imperative” that Spain continues with its fiscal adjustment and structural reform programs in order to return to growth.

As a result of the government’s continued inability to balance its books, outstanding public debt is forecast to increase from 88 percent of GDP last year to above 100 percent in 2014.

The Rajoy administration continues to insist the economy will shrink by only 0.5 percent after a contraction of 1.4 percent last year. But experts, not least the Commission itself, are skeptical. The EC on Friday estimated GDP would shrink by 1.4 percent this year before returning to growth of 0.8 percent the following year, a pace of activity too weak to generate much-needed employment. Brussels prediction is for zero job creation next year. The government is predicting GDP growth of 1.2 percent for 2014.

Rajoy encapsulated the administration’s rose-tinted view of the scenario facing his fellow citizens in the State of the Nation debate when he said: “Now we have a future when a year ago we did not.”

Export sector one of the few bright spots in the economic scenario

For the euro-zone economy as a whole, the Commission now expects output to contract by 0.3 percent this year compared with a prediction in November of growth of 0.1 percent. It painted a more positive picture for 2014 when it expects GDP to grow 1.4 percent. “The present forecast projects a return to moderate growth in the course of this year, as confidence gradually recovers and the global economy becomes more supportive,” the head of the EC’s economic department, Marco Buti, said.

The Commission predicted the average jobless rate in Spain would rise from 25.0 percent at the end of last year to 26.9 percent this year, before easing somewhat to 26.6 percent in 2014. The administration expects it to fall to 24.3 percent in 2013 and to 23.3 percent in 2014.

The only bright spot in the scenario predicted by Brussels for Spain is the export sector, which is expected to remain strong and help partly offset the negative contribution of domestic demand as a result of the austerity drive and weak household spending due to high unemployment. “Despite a weakening outlook for the euro area, export sales have shown significant resilience,” the Commission’s report said.

The EC predicted net trade – exports minus imports – would add 2.6 percentage points to GDP growth this year and 1.3 points in 2014. In contrast, domestic demand is expected to make a negative contribution of 4.0 points this year and 0.5 points the following year.

The Commission attributed the strong performance of the export sector to improved price competitiveness, noting that “wages are becoming more sensitive to the economic situation.” The EU executive branch also highlighted increased exports to emerging countries.