Boston, MA -- (ReleaseWire) -- 10/05/2012 -- Core Views Spain's domestic economy continues to be crippled by the government's fiscal austerity drive, with unemployment continuing to head higher, and house prices still tumbling. At the same time, Spain's ability to export its way out of recession has disappeared given that the rest of the eurozone is caught up in a pronounced slowdown. It is becoming increasingly clear that fiscal austerity is not working for Spain, and in order to escape the debt-deflationary trap, the country is in desperate need of a growth stimulus. For the foreseeable future, the European Central Bank will need to continue to safeguard Spain's financial stability via further liquidity provisions and a potential resumption of its Securities Markets Programme. Despite the pronounced slowdown in growth being felt across the eurozone, we still expect Spain's current account adjustment process to continue over the next few years. While exports will suffer this year, we believe that Spanish domestic demand will ultimately be harder hit by the government's greater push for fiscal austerity. However, precluding a more pronounced correction is the income account, which, owing to sustained outgoing interest payments on external debt, will remain heavily in the red for the foreseeable future. Following a tough start to 2012, economic and political pressure on the centre-right administration is unlikely to ease over the next 12 months. The administration will need to continue to balance the divergent goals of fiscal deficit reduction and economic growth. As the government has little room for manoeuvre on the fiscal front, we expect public discontent and social stability to continue deteriorating. Major Forecast Changes We have revised down Spain's medium-term growth trajectory on account of more aggressive fiscal austerity at home and weakening economic activity in the wider eurozone region. We now envisage negative real GDP growth of 0.2% in 2013, followed by modest growth of 0.8% in 2014, significantly down on our previous forecasts of 0.8% growth in 2013 and 1.2% in 2014. Key Risks To Outlook The biggest risk to our forecasts stems from the government's fiscal strategy. While the private sector remains in no state to drive the economy forward, should the government push too hard on the fiscal brakes, it could lead to an even greater downturn in real GDP. This would render the government's fiscal consolidation strategy self-defeating and would prompt us to reassess our growth, fiscal and debt forecasts. Similarly, a further decline in eurozone economic activity would have a severe impact on the Spanish economy. While net exports will not be sufficiently strong enough to pick Spain up out of recession in 2013, for now it remains a positive contributor to headline growth. Weaker export growth could see Spain's economic contraction over the next two years prove even more severe than currently envisaged.
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