The Bank of Spain yesterday forecast slower growth and a higher public deficit for the country than is estimated by the government, which is fending off market fears it will need a financial bailout.

The bank predicted the economy will grow by 0.8 per cent in 2011 and 1.5 per cent in 2012, well below the government’s forecasts of 1.3 per cent growth this year and 2.5 per cent in 2012.

It forecasts the public deficit will total 6.2 per cent of gross domestic product in 2011 and 5.2 per cent in 2012. The government predicts the deficit will hit six per cent of output in 2011 and 4.4 per cent next year.

The economy is “still immersed in a difficult situation, that requires, on one hand, the continuation of ambitious policies and pressure to correct the fiscal imbalances and on the other hand, progress in structural reforms that favour growth,” the bank said in its latest economic bulletin.

Spain is fending off fears in international financial markets that its public deficit is unsustainably high and could prompt the country to follow Greece and Ireland into seeking a multi-billion euro EU-IMF bailout.

The government has slashed spending and passed pension reforms to rein in spending. It has also reformed the labour market in an attempt to revive the economy and fight an unemployment rate of just over 20 per cent, the highest in the industrialised world.