Bank of Spain estimates economy shrank 0.1 % in 2010

The Bank of Spain estimated yesterday that the economy shrank by 0.1 per cent in 2010, a better performance than expected by the government after an expansion in the final quarter.

Spain is fighting to revive its economy, Europe’s fifth-largest, and convince nervous investors that it will grow enough to bring its massive public deficit under control without resorting to a Greek or Irish style bailout. The government on Wednesday signed a “grand social pact” on re-forms covering pensions and collective bargaining to boost growth and slash an unemployment rate of just over 20 per cent, the highest level in the industrialised world.

It had predicted the economy would shrink by 0.3 per cent in 2010 after contracting 3.7 per cent the previous year, although in recent weeks officials had forecast the decline this year would be limited to 0.2 per cent.

“The estimates carried out, based on the available information, show that the recovery continued in the final quarter, with a quarterly increase of 0.2 per cent,” the Bank of Spain said in its latest monthly economic bulletin.

The Spanish economy slumped into recession during the second half of 2008 as the global financial meltdown compounded the collapse of a credit-fuelled property boom that had been the driver of growth for over a decade.

It emerged with tepid growth of just 0.1 percent in the first quarter and 0.2 per cent in the second, but then stalled with zero percent growth in the third.

Prime Minister José Luis Rodriguez Zapatero’s Socialist government predicts Spain will expand by 1.3 per cent this year and will grow faster than the European Union average as early as 2013.

The International Monetary Fund predicts the Spanish economy will post growth of just 0.6 per cent this year which will pick up to 1.7 per cent in 2012 and 1.9 per cent in both 2013 and 2014.

Stronger growth is key to the government’s goal of slashing Spain’s public deficit to below the European Union limit of three per cent of gross domestic product by 2013.

Spain’s public deficit hit 11.1 per cent of GDP in 2009, the third-highest in the eurozone after Greece and Ireland, both of which have subsequently required European bailouts. Madrid has since announced a raft of austerity measures, including an average cut to public workers’ pay of five percent and plans to sell stakes in the national lottery and the country’s main airport operator, to help bring the deficit under control. It has also taken steps to strengthen the financial system by requiring all lenders to raise their levels of rock-solid core capital or face state intervention.

German Chancellor Angela Merkel hailed the reforms undertaken by Spain during a visit on Thursday to Spain.

“Spain has really done its homework and for that reason I think Spain is on a very good path,” she said when asked at a joint news conference with Mr Zapatero if she could “absolutely” rule out the need of a rescue package for Spain.

The national statistics institute will publish its provisional data for fourth quarter GDP growth on Friday. It will publish final data for the period five days later.