Spanish central bank offers grim economic forecast

MADRID (AP) -- Spain will sink deeper into recession and unemployment will worsen this year as the country struggles under the weight of austerity measures taken to repair public finances and the effects of a weak global economy, the central bank said Tuesday.

The Bank of Spain said it expected the economy to contract 1.5 percent this year, compared with 1.4 percent in 2012, and only return to growth in late 2014.

The conservative government had predicted a 0.5 percent contraction for this year although Prime Minister Mariano Rajoy was pushed to admit last week that he would have to revise forecasts in April.

Spain's economy, the fourth-biggest in the 17-country eurozone after Germany, France and Italy, has been shrinking for the last 18 months.

The bank forecast the jobless rate would rise to 27.1 percent by the end of this year, from a current 26 percent. That also won't start falling until 2014, it said.

The budget deficit, meanwhile, is expected to drop to 6 percent of annual economic output in 2013, down from 6.7 percent last year. The 2012 figure excludes a 40 billion euro ($51.7 billion) bailout granted by the eurozone group of countries for Spain's troubled banks and which the European Commission has agreed not to take into account. Including the rescue funds would have left last year's deficit at 10 percent.

Spain had initially promised European authorities it would cut its deficit to 6.3 percent in 2012 after the 2011 figure was found to have soared to 8.9 percent, nearly three times the EU limit. It had also promised to reduce the deficit to 4.5 percent in 2013 but that figure has long been seen as unrealistic and Spain is now negotiating an easing of its targets with the European Commission.

In his pursuit of the promised deficit reductions, Rajoy has broken every major election campaign promise by introducing austerity measures, reforms, wage cuts and tax hikes, all of which have stirred much social unrest and triggered two general strikes over the past 15 months.

The economy, once one of Europe's healthiest, went into a tailspin in 2008 as the international financial crisis contributed to the collapse of its key construction sector.

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Associated Press writer in Lisbon Barry Hatton contributed to this report.