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EU Sees Biggest Spain Growth Since 2007 as Budget Gap Grows

Source: Bloomberg - Mon 5th May 2014
EU Sees Biggest Spain Growth Since 2007 as Budget Gap Grows

The EU forecast that Spain will post its fastest economic growth in 8 years in 2015 as PM Mariano Rajoy allows his budget shortfall to rise in the run up to a general election.

Spanish GDP will grow 2.1% next year and the budget deficit will widen to 6.1% of GDP unless Rajoy changes his current policy settings, the EU said today in its spring economic forecast.

The EU's outlook for the economy next year, raised from a previous estimate of 1.7%, exceeds the Spanish government's prediction for a 1.8 % expansion. Rajoy's government also said it will meet its 4.2% deficit target in 2015.

Rajoy is trying to convert Spain's economic gains into political capital as he enters a string of elections beginning with this month's vote for the European Parliament and ending with a general election due by November next year. The economy expanded for a 3rd straight quarter in the first 3 months as Spain emerges from a 6-year slump that pushed unemployment as high as 27%.

"Employment is expected to grow faster in 2014," the EU said in today's report. "Domestic demand takes over as the main growth driver" through next year, it said.

Quantitative Easing

With slowing inflation across the euro area crimping Spain's competitiveness gains, Rajoy has urged ECB President Mario Draghi to unleash the program of quantitative easing that central bank officials have been devising in order to boost prices across the currency area.

Inflation in Spain will remain "very low" at 0.1% this year and 0.8% in 2015, the EU said. Unemployment will see a "moderate fall," reaching 24% next year.

"What's important is that the European Commission says that next year Spain will grow more than the European average and will create more employment than the European average," Economy Minister Luis de Guindos told reporters in Brussels today. "I think that's the message and it's a very positive message."

Budget Minister Cristobal Montoro ruled out further budget cuts last week saying that the measures already in place will be enough to meet Spain's deficit targets through 2016, when the government is committed to cutting the shortfall to 2.8% of GDP. The EU said its forecast for the gap to widen next year assumes temporary tax increases will be allowed to expire by the end of this year.

Further Reading :

* Spain's economy grows at fastest pace in 6 years

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