Brussels sees slightly wider recession in Spain this year

The latest macroeconomic forecasts for Spain released Friday by the European Commission painted a slightly more negative picture than its previous predictions, as well as those of the Spanish government.

As a result, Brussels appears willing to give Spain another two years to bring its budget deficit back within the European Union ceiling of 3 percent of GDP, a grace period that is also likely to be extended to France.

The EC is now forecasting that the Spanish economy will shrink by 1.5 percent this year, compared with an earlier forecast of 1.4 percent. GDP declined 1.4 percent in 2012. The government expects a contraction of 1.3 percent, recently revised from an unrealistic decline of just 0.5 percent.

Brussels and Madrid are also somewhat at odds about the public deficit for this year, with the EC predicting a shortfall of 6.5 percent, compared with the government’s estimate of 6.3 percent.

However, the Commission’s forecasts do not take into account the planned budget savings of three billion euros that include spending cuts and environmental taxes that the government of Prime Minister Mariano Rajoy plans to introduce this year along with a series of further reforms.

The discrepancies between the forecast of Madrid and Brussels for 2014 are larger in scope, although conditioned by the impact of the fiscal measures reforms Rajoy is planning. The Commission expects GDP to grow 0.9 percent this year but the figure does not incorporate the government’s announcement of a one-year extension in temporary hikes in personal and corporate taxes. The government’s forecast is for GDP to grow 0.5 percent in 2014.

“Taking into account the additional measures of fiscal consolidation required to underpin the budgetary target for 2014, this may lead to a downward revision of growth compared with the current forecast,” the EU commissioner for economic affairs, Olli Rehn, said.

While Brussels expects the deficit figure of 10.6 percent (which includes the bailout to clean up Spain’s banking system) to shrink to 7.0 percent next year, the government is forecasting a shortfall of 5.5 percent.

In terms of unemployment, Brussels and Madrid coincide in forecasting an average rate of 27 percent this year. Rehn urged countries such as Spain and Greece to do everything possible to reduce their unacceptably high jobless rates, but did not say how this was to be made compatible with reducing the deficit-reduction program Brussels is insisting upon, particularly when the government this year plans to save 800 million euros by cutting spending on measures aimed at getting workers back to work.

“In view of the protracted recession, we must do whatever it takes to overcome the unemployment crisis in Europe,” Rehn said. “The EU's policy mix is focused on sustainable growth and job creation."

Recovery in Portugal?

The Commission also presented revised forecasts for Portugal, whose economy is expected to shrink this year by 2.3 percent after contracting 3.2 percent the previous year. However, the projections are also conditioned by the fact that the government will have to come up with alternative measures worth some 1.3 billion euros to meet its deficit target for this year after the Constitutional Court threw out some items included in this year’s budget.

A recovery in the economy is expected to emerge in 2014 when GDP is forecast to grow 0.6 percent. But that will not help out the labor market, with the jobless rate seen rising to 18.2 percent this year from 15.9 percent in 2012 and to 18.5 percent in 2015.

The budget deficit is projected to decline from to 5.5 percent this year and 4.0 percent in 2014.

For the euro zone as a whole, the Commission predicted a decline of 0.4 percent in activity this year before returning to growth of 1.2 percent next year. Its previous estimates were for a contraction of 0.3 percent this year and growth of 1.4 percent in 2014.