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EU sees Spain stuck on verge of recession until 2013

Commission report also casts doubt on ability of Madrid to steer home deficit-reduction targets

The European Commission on Thursday slashed its own projections for growth in Spain to 0.7 percent of GDP this year and again in 2012 from its prior predictions of 0.8 percent and 1.5 percent, respectively. Published in a report released Thursday, the new figures from Brussels are now much more in line with what other international organizations expect for the Spanish economy.

The report predicts that "real GDP will gather some pace in 2013."

Spain's economy is burdened by a debt crisis, sharp adjustments in public financing and the money problems facing families and businesses. Unemployment stands at almost five million, according to last month's population survey.

"A weakening external environment and heightened uncertainty compared with spring have led to a downward revision of projected economic growth in 2011 and 2012," says the European Economic Forecast for autumn. "Net exports should continue to support growth, with domestic demand becoming less of a drag over the forecast horizon and gaining strength from 2013 onwards."

The EC also says that Spain won't meet its objectives to reduce the country's debt to the euro-zone ceiling of 3 percent of GDP by the end of 2013. In fact, the Commission believes Spain will close the year with a budget deficit of 6.6 percent while the Socialist government has insisted that it will keep the figure within the target of six percent.

"This reflects in particular the fact that many autonomous communities exceeded considerably their budget deficit targets for the first half of the year. In the meantime, consolidation measures are being put in place both at regional and central level, which will have an impact in the second part of the year and contain the expected end-of-year slippage." The EC said that further "corrective measures" by the government are needed to help put Spain back on its target this year.

Besides regional administrations, social security is another area where spending problems still exist, says the EC.

Banks still have considerable exposure to the real estate sector which will lead to further reduced lending and "negative consequences for investment and consumption of durable goods," the report states.

As for the jobless rate, the forecast says that unemployment is not expected to fall below 20 percent in the next two years. "In 2012, additional job shedding should put upward pressure on the unemployment rate, although this is likely to limited by a decrease in the active population due to the sizeable net outflow of migrant workers."