Business News

Spain Likely to Miss Growth Forecasts: Minister

Reported by Stephane Pedrazzi, Written by Catherine Boyle

As the Spanish economy fails to drag itself out of the mire created by its debt burden, its Employment Minister Valeriano Gomez admitted to CNBC that it would likely miss growth targets this year.

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Gomez said in an interview that the official government target of 1.3 percent gross domestic product growth for 2011 "we probably can't reach" as the economy teeters on the verge of another recession and unemployment continues to soar.

On Tuesday, it emerged that Spain experienced its worst September increase in registered unemployment for at least 15 years, with 4.2 million people now claiming unemployment benefits after public sector job cuts. Its unemployment rate of 21 percent is the highest in Europe.

"Growth of 1 percent this year is clearly insufficient to create net jobs," said Gomez.

He appealed to Spain's euro zone partners to consider alternative ways of increasing growth, rather than continuing harsh austerity measures.

"Deficit targets will be achieved this year and in the next, but we have to analyze at the European level whether growth targets will be reached," he said.

"Obviously states can reach deficit targets by implementing spending cuts or raising taxes but we will then enter a cycle where recession is a risk. The result would not be a deficit reduction that comes from stronger economic growth and improvement of public finance and reduction of structural deficit. We need to avoid that."

"In the context of increased fiscal consolidation, we would end up in a spiral with more recession or more stagnation," he warned.

"We need to analyze how to recover maximum growth in this part of Europe (the PIIGS countries)."

Together with Portugal, Ireland, Greece and Italy, Spain is viewed as one of the euro region countries most at risk of defaulting on its debt repayments.

Spain's economy grew 0.4 percent in the first three months of 2011 and only 0.2 percent in the next three months. Analysts are increasingly concerned that growth may fall into negative territory in the final quarter of 2011 after International Monetary Fund (IMF) forecasts are for much lower economic growth of 0.8 percent for Spain this year.

Gomez said that the Spanish economy should be able to create between 40-50,000 net jobs by the end of the year, and admitted this "is still very low."

"We have to solve the liquidity problem in our financial sector which is the key to getting out of this problem," he said.

"I think the country is now ready to solve its financial crisis. It has the conditions to return to growth but it needs important capital and the urgent recapitalization of our financial institutions."

Exports are the key to stimulating growth in Spain, he believes.

"Spain must keep a high level of exports and a high capacity of competitiveness," he said.