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EU Confirms Spain Will Relapse Into Recession, Warns on Further Austerity

Friday, 24 February 2012 | 11:00
Spain’s economy will relapse into a recession in 2012 and additional austerity measures may worsen the slump, the European Commission said.
Spain’s economy will contract 1 percent this year after expanding 0.7 percent in 2011, the commission said in a report today. In November, the commission had forecast Spanish growth of 0.7 percent in 2012.
“Additional fiscal measures in the forthcoming budget may significantly change the picture,” the commission said.
Spain’s deficit-reduction efforts are being hobbled by a slump in growth since the last quarter of 2011. The International Monetary Fund expects the fourth-largest economy in the euro area to contract 1.7 percent this year, its second recession in as many years, preventing the nation from meeting its budget goals.
Private consumption will be “significantly weaker” this year, weighed down by austerity and “persistently high” unemployment, the commission said. Exports are expected to be “relatively resilient,” as inflation slows to 1.3 percent from 3.1 percent in 2011, falling below the euro-area average and improving the country’s price competitiveness.
Prime Minister Mariano Rajoy’s People’s Party government, in power since December, has been waiting for the EU growth forecast to draft its 2012 budget next month. Rajoy has already raised taxes and cut spending to reduce the deficit by about 15 billion euros ($20 billion). Unchanged deficit goals for 2012 would force him to find another 25 billion euros, according to an estimate by Moody’s Investors Service.
The EU asked Spain last month to take additional austerity steps after the government said it expects a shortfall a third larger than its target in 2011. Members of Rajoy’s government have said the nation will struggle to shrink the gap from around 8 percent of gross domestic product to 4.4 percent of GDP this year as the economy contracts.
Source: Bloomberg
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