Madrid.—Spain's economy will sink deeper into recession this year, the Bank of Spain said yesterday, sending a stark message to the government as it prepares to revise its own growth forecast.

In its annual update of economic forecasts, the central bank said it saw Spain's economy shrinking by 1.5 percent in 2013 following a 1.4 percent contraction last year as austerity continues to exacerbate the effects of a burst property bubble.

The central bank's new estimate is well below the official forecast for a 0.5 percent contraction in GDP, although the government is widely expected to revise the 2013 figure downwards in April. The Bank of Spain prediction is broadly in line with consensus, with most economists expecting the economy to struggle to return to growth this year on the back of dire domestic demand and a weakening external sector.

Factors hitting growth will weigh heavily at the beginning of year, the central bank said. “Private agents remained immersed in a process of deleveraging, families have seen a notable shrinking of income, public accounts continue on their path toward sustainability and residential investment has not yet hit bottom,” the bank said.

Spain sank into its second recession since 2009 at the end of 2011 as the fallout from a property bust five years ago continued to weigh on every aspect of economic activity, from its beleaguered banks to high street sales.

Exit the recession
The Bank of Spain data suggested the quarterly contraction in the first three months of this year had been less pronounced than in the last quarter of 2012, when economic output shrank at the fastest rate since the beginning of 2009.

It said the Spanish economy would exit the recession and register growth of 0.6 percent in 2014.
Spain's Economy Minister Luis de Guindos said in an interview on Sunday he expected the economy to return to quarterly growth by the end of 2013 and expand almost 1 percent next year.

Unemployment is likely to hit another record high of 27.1 percent in the course of the year, the central bank said, up from a current 26 percent, one of the highest rates in the euro zone.

The bank also said the public deficit would reach 6 percent of gross domestic product for 2013, above targets set by Europe of 4.5 percent of GDP this year, and 5.9 percent of GDP in 2014.

Spain is in talks with the European Commission to soften its deficit-cutting path. It hopes to get one or two extra years, until 2016, to bring its budget shortfall under the European Union's ceiling of 3 percent of GDP.

The government slashed the public deficit from almost 9 percent in 2011 to 6.7 percent in 2012 through tax hikes and spending cuts. The central bank warned on Tuesday that many temporary tax increases would need to be made permanent.

Tax measures “It's important to note that in 2014, a number of tax measures put in place in 2012-2013, with an important impact on revenue, will expire,” the bank said. “This report assumes that the measures will continue in to 2014 given that, in their absence, the public deficit will once again start to rise.” Spain's conservatives have said that increases in income tax, the removal of a select number of tax deductions and a property tax hike would not be renewed in next year's budget.

Measures which front-loaded tax revenue into 2012 and delayed rebates to this year are adding further pressure on the government to announce new budget consolidation measures to keep the deficit down.