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Economic Recovery in Spain Expected Early 2014

Source: The Record - Fri 14th Jun 2013
Economic Recovery in Spain Expected Early 2014

The Spanish economy will shake off its recession and growth will accelerate through 2015 as European Union officials ease demands for budget cuts, economists said.

Economic output in Spain will increase for the first time since 2011 in the first quarter of 2014 and expand by 0.5 percent over the year, according to the median of 32 forecasts in the Bloomberg monthly survey. That compares with a previous estimate for a 0.3 percent expansion next year. The economy will grow by 0.9 percent in 2015, the survey showed.

"There is an expectation that the fiscal consolidation will be less of a drag than before," Luigi Speranza, an economist at BNP Paribas in London, said in a telephone interview yesterday.

Prime Minister Mariano Rajoy last month persuaded the European Commission to push back the deadline for bringing the Spanish budget deficit into line with EU limits by two years to 2016 to help support demand. European policymakers have reined in their deficit-cutting vigor and the International Monetary Fund issued a mea culpa for its role in policy measures that helped knock 17 per cent off Greek output since 2008.

Spain's budget deficit will narrow to 5.6 percent of gross domestic product next year from 6.5 percent this year, according to the survey. Last month's poll showed a 5.2 percent deficit for next year.

Economy Minister Luis de Guindos said June 9 he expects Spain's economy to surpass consensus forecasts this quarter and renewed the government's pledge to reverse income tax hikes before 2015 when the next election is due. The government will begin cutting income tax next year, Industry Minister Jose Manuel Soria said in a radio interview Thursday.

House prices in Spain fell at the fastest pace on record in the first quarter. Home values dropped 6.6 percent from the previous three months, data showed Thursday.

Last week de Guindos rejected calls by European Central Bank President Mario Draghi for the government to cut "unproductive" spending to increase the room for tax cuts to spur growth. De Guindos said Spain's decision to deliver about 30 percent of its deficit reduction through tax increases was endorsed by the European Commission and the ECB.

"What matters is what the ECB thinks as an institution," he said on June 7 when asked about Draghi's comments.

The ECB raised its 2014 growth forecast for the single- currency area to 1.1 percent from 1 percent last week even as it projected a deeper contraction this year of 0.6 percent.

In a separate Bloomberg survey of 50 economists, the median estimate forecast for the euro area was for a 0.6 percent contraction this year. Their forecast for 2014 is for 1 percent growth, the survey shows.

In the ECB's monthly bulletin released Thursday, officials wrote that underlying euro-region price pressures are "expected to remain subdued" and that accommodative monetary policy and an improvement in financial markets should support prospects for an economic recovery later this year.

Rajoy is urging Draghi to introduce a program to channel credit to small and medium-sized companies in Spain, Italy and Portugal to provide an additional stimulus to economic activity. Those companies haven't benefited from record low interest rates because many banks are rebuilding their balance sheets, restricting the amount of credit available.

"The issue for the periphery remains that monetary and financial conditions are tight," Speranza said.