Spain's economy will sink deeper into recession this year, the Bank of Spain said on Tuesday, 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 of 0.5 percent of GDP, although the government is widely expected to revise that 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.
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.
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 the gross domestic product shrank at the fastest rate since the beginning of 2009.
It said the Spanish economy would exit the recession and register a 0.6 percent growth 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.
But unemployment is likely to hit another record high of 27.1 percent in the course of the year, the bank said, up from a current 26 percent, one of the highest rates in the euro zone.
It also said the country's public deficit would reach 6 percent of gross domestic product for 2013, above targets set by Europe of 4.5 percent of GDP, and 5.9 percent of GDP next year.
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 reduce its budget shortfall under the European ceiling of 3 percent of GDP.