The European Commission have said that Spain’s economy will fall into recession once again during 2012, adding that additional austerity measures may worsen the situation.
Following a 0.7% expansion of the economy in 2011 the EU predict a 1% contraction this year. The commission had previously predicted growth of 0.7% for 2012.
“Additional fiscal measures in the forthcoming budget may significantly change the picture,” the commission said.
Spain’s efforts to reduce the deficit gap are being stifled by a fall in growth since the final quarter of 2011 and the International Monetary Fund (IMF) expects Spain’s economy, the fourth-largest in the Euro zone, to contract 1.7% this year. This will be the second official recession in as many years and will make it even harder for Rajoy’s government to meet it’s targets.
Private spending will be “significantly weaker” this year, exacerbated by “persistently high” unemployment across the country, the commission said. However, they also expect exports to be “relatively resilient,” as inflation slows to 1.3%, below the euro-average, and down from 3.1% in 2011.
Mariano Rajoy, in power since election victory in November, has already increased taxes and cut spending in efforts to reduce the deficit by around 15 billion euros. He has been waiting the EU forecasts before drafting the budget next month which is expected to contain further spending cuts and tax increases – all part of the plan to reduce the deficit gap to the EU target of 4.4%, a target Rajoy thinks impossible.