Brussels doubles its growth forecast for Spain for this year

The Spanish economy will grow 1.0 percent this year, with growth accelerating to 1.7 percent in 2015, according to the European Commission’s winter forecasts released Tuesday.

The growth forecast for 2014 is twice as much as Brussels had previously estimated, and improves on both the International Monetary Fund and the Spanish government’s own predictions, which are for growth of 1.0 percent this year and 1.5 percent next year, as revealed on Tuesday by Prime Minister Mariano Rajoy.

The Spanish economy pulled out of its longest recession since the restoration of democracy in the third quarter of last year, with growth accelerating from 0.1 percent to 0.3 percent in the last quarter of the year, driven by the exports sector. Even so, full-year output contracted 1.2 percent.

The Commission expects growth to be more balanced in the coming quarters as domestic demand gathers momentum, with the contribution from the export sector to GDP declining, although export growth will remain “robust.” However, Brussels warned of the possible negative impact from Spain’s exposure to turbulence in emerging markets, particularly Latin America.

“The worst of the crisis may now be behind us, but this is not an invitation to be complacent, as the recovery is still modest."

Despite the improved outlook, the Commission expects high unemployment and debt will continue to weigh on the economy, while pointing out that credit remains tight. “In general, financial conditions have improved, but they still remain onerous for some borrowers, especially SMEs,” the Commission said.

Employment is expected to start posting positive growth rates this year, although not enough to make big inroads into the jobless rate, which is expected to decline from 26.4 percent last year to 25.7 percent this year and to 24.6 percent by the end of 2015.

 The EC’s report notes that Spain’s public deficit was 7.2 percent of GDP last year, although half a point of that figure represents aid to banks, which does not count towards Spain’s target of 6.5 percent of GDP. It expects Spain to meet its target for next year of 5.8 percent of GDP, before rising again to 6.5 percent in 2015 as a result of some temporary tax measures expiring. Public debt is expected to continue to increase next year and the next when it will hit 103.3 percent of GDP, therefore exceeding the annual output of the economy.

For the euro zone as a whole, the Commission is predicting that GDP will rise by 1.2 percent this year and by 1.8 percent in 2015. “The worst of the crisis may now be behind us, but this is not an invitation to be complacent, as the recovery is still modest. To make the recovery stronger and create more jobs, we need to stay the course of economic reform,” said Olli Rehn, the EU commissioner for Economic and Monetary Affairs and the Euro.

The Commission’s forecasts for Portugal are based on the 10th review in mid-December of the compliance of Prime Minister Pedro Passos Coelho’s center-right government with the terms of its 78-billion-euro bailout package from the EU and IMF. These include a return to growth of 0.8 percent this year after a contraction of 0.8 percent in 2013, accelerating to 1.5 percent in 2015. The jobless rate is expected to rise this year to 16.8 percent from 16.5 percent before falling back again to 16.5 percent.

The Commission is upbeat about Portugal meeting its deficit targets of 4.0 percent of GDP this year and 2.5 percent in 2015, although it warned of the risk of the Constitutional Court throwing out some budget measures as it has already done.

CORRECTION: An earlier version of this story incorrectly said that Brussels is predicting Spain would miss its deficit target for this year when in fact the goal is 5.8 percent not 6.5 percent.