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EURO-ZONE ECONOMY

Brussels lowers its forecast for Spanish growth in 2014

GDP now seen expanding by just 0.5 percent, way down on earlier estimate of 0.9 percent

The European Commission on Tuesday lowered its growth forecast for Spain for next year and warned that public debt would continue to grow because of the country’s failure to adequately rein in its public deficit.

In its fall forecast for the euro zone, Brussels said it now sees GDP in 2014 expanding only 0.5 percent, compared with a predicted rise of 0.9 percent in its spring estimates. The government foresees growth in output of 0.7 percent for next year, while the IMF’s estimate is for an increase of only 0.2 percent.

However, the Commission raised its GDP forecast for the current year from a contraction of 1.5 percent predicted in the spring to a decline of 1.3 percent, in line with the Spanish government’s estimate. The main driver of growth will remain net trade – exports minus imports – with domestic demand exercising less of a drag on overall output.

On the fiscal side, Brussels sees the public deficit coming in at 6.8 percent including the impact of the bailout for the banking sector, which the Commission estimated at 0.3 percentage points. The government’s target is 6.5 percent of GDP.

The shortfall is expected to narrow to 5.9 percent in 2014 and, in the absence of further measures, to expand again in 2015 to 6.6 percent when it expects the economy to be growing at a rate of 1.7 percent, again assuming there are no changes to government policy.

Large public deficits and Low growth will

push government

debt to above 100 percent of GDP"

At a presentation of the report, the European Union commissioner for economic and monetary affairs, Olli Rehn, said Spain and France were the two euro-zone countries most in need of structural reforms. Deputy Prime Minister Soraya Sáenz de Santamaría recently said that only about 10 percent of the government’s reform program remains to be completed.

The government is waiting for a report from the OECD on the impact of labor reforms introduced in February of last year to determine whether further structural adjustments are required.

The shortfall in the country’s finances is set to boost public debt from 94.8 percent of GDP in 2013 to 99.9 percent next year, and 104.3 percent in 2015, levels not seen for over a century.

“Large public deficits and low nominal GDP growth are projected to push the general government gross debt to above 100 percent of GDP over the forecast horizon,” the EC said.

Unemployment is due to remain “unacceptably” high over the next two years because of the weakness of economic growth, Rehn said. The average jobless rate is expected to decline marginally to 26.4 percent next year from 26.6 percent this year and to 25.3 percent in 2015.

Meanwhile, Brussels said it had slightly raised its economic outlook for Portugal for this year and the next as a result of stronger than expected GDP growth in the second quarter of this year. The economy is expected to contract 1.8 percent this year before returning to growth of 0.8 percent in 2014. Net trade is expected to remain the main driver of growth, although there will be also a positive contribution from domestic demand next year.

GDP growth in 2015 is projected at 1.5 percent with a roughly balanced contribution from net trade and domestic demand.

Unemployment is expected to average 17.4 percent in 2013 before peaking at 17.7 percent in 2014 and dropping back to 17.3 percent in 2015.

Brussels believes Portugal is on track to meet its deficit-reduction obligations, with the shortfall narrowing to 4.0 percent next year from 5.9 percent this year and coming within the EU ceiling of 3 percent of GDP in 2017, when it is estimated to come in at 2.5 percent.

The estimates are underpinned by fiscal consolidation measures worth an estimate 2.3 percent of GDP, mostly in the form of permanent spending cuts.

Brussels sees the main risk to the estimates for this year as being “mostly of a legal nature” as some items in the 2014 budget will be reviewed by the Constitutional Court, which has already thrown out previous measures approved by the government.

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