OECD warns against extra austerity measures in Spain

PARIS Tue Nov 27, 2012 5:00am EST

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PARIS Nov 27 (Reuters) - Spain will miss targets for cutting its budget deficit through to 2014 due to persistent recession and more austerity measures would only make the problem worse, the OECD said on Tuesday.

The Organisation for Economic Co-operation and Development predicted Spain's economy would contract by 1.3 percent this year, and by 1.4 percent in 2013, brought down by a euro zone recession and the effects of the spending cuts and tax hikes it has already made.

Its forecast for next year was in line with those of private economists, and nearly three times the 0.5 percent contraction forecast by the government.

Spain will try to shrink spending with measures worth over 60 billion euros ($78 billion) to 2014 to try to convince investors that it is bringing its finances under control.

The economy, the euro zone's fourth largest, has been hovering on the brink of the bloc's sovereign debt crisis.

"Fiscal consolidation is expected to have stronger than usual effects on growth in this credit-constrained environment, which militates against taking further measures to hit headline targets, especially if growth turns out much weaker than government plans," the OECD said in its economic outlook.

The OECD forecast Spain's deficit at 8.1 percent of gross domestic product (GDP) this year, narrowing from 9.4 percent last year but missing the state's 6.3 percent target. Next year it saw the deficit at 6.3 percent, missing a 4.5 percent goal.

Spain's economy was projected to climb out of recession in 2014, but grow by just 0.5 percent, with unemployment rising to 26.9 percent in 2013, from 25 percent this year, and stuck at 26.8 percent in 2014.

The OECD urged the government to keep up reforms aimed at making the economy more competitive and to finish restructuring its banking sector.

It held out hope that Spanish gains in cost competitiveness and export share may be even stronger than expected, helping to alleviate next year's downturn.

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