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Spanish central bank predicts big drop in economy

By Daniel Woolls

Associated Press

Published: Monday, Jan. 23 2012 8:03 a.m. MST

MADRID — Spain faces more unemployment misery and needs serious labor market reforms, the country's central bank warned Monday as it slashed its economic forecasts for this year.

The Bank of Spain predicted the country's economy will contract 1.5 percent this year, rather than expand by that same amount as per its forecast until now.

In a report, the bank said that since last summer the eurozone debt crisis has sapped business confidence and choked off bank credit. This has caused a major drop in domestic demand, only partially offset by strong exports.

In 2012, household spending will contract because of €15 billion ($19 billion) in tax hikes and spending cuts already enacted by the new conservative government to chip away at the budget deficit, it said.

The economy will expand in 2013, but only by 0.2 percent, the central bank forecast.

It warned that the gloomy outlook will hit jobs without thorough labor market reforms. Spain already has a 21.5 percent unemployment rate and figures due out Friday are expected to show a further rise.

The new conservative government that swept to power after Nov. 20 elections has warned Spain will fall into recession this quarter because of declines in GDP in the last three months of 2011 and the first quarter of 2012.

According to figures released Monday from the Bank of Spain, fourth quarter GDP was down 0.3 percent compared with the previous quarter.

The Bank of Spain's 2012 GDP forecast until now was already much less optimistic than the 2.3 percent rise that the outgoing Socialists clung to as a forecast almost until they left office. They then lowered it significantly, but never predicted economic contraction.

The government has already said that because of the economic conditions, the 2011 deficit will be closer to 8 percent than the 6 percent which had been forecast by the outgoing Socialists.

Now, Finance Minister Cristobal Montoro is suggesting that what had been a sacred mantra for the ruling Popular Party — reducing it to 4.4 percent of output this year — may not be achievable.

Separately, Development Minister Ana Pastor froze plans to sell concessions to run Madrid and Barcelona airports, saying economic conditions were not right.

The idea originated from the last government but was delayed in October on grounds bidders wanted more time to raise money. That government had hoped to bring in a total of €5.3 billion to reduce Spain's debt.

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