Spain's economy shows no signs of recovery and the country risks missing budget deficit targets this year and in 2013 as a deep recession drags on, its central bank governor said on Wednesday.
The prolonged downturn and record unemployment have fuelled doubts Madrid will be able to bring its deficit into line with European Union targets, and many expect the country will need aid from euro zone peers that have already bailed out its banks.
Bank of Spain governor Luis Maria Linde told lawmakers the economy was still not showing signs of strengthening, although he later gave reporters a more upbeat view.
"The process of adjustment in the Spanish economy is at a delicate point, in which an improvement in activity and job creation is yet to be seen," Mr. Linde said to parliament.
"The available information does not allow us to rule out the possibility of a deviation (from deficit reduction targets)," he added later in the speech.
Spain aims to reduce its budget deficit to 6.3 per cent of gross domestic product this year and to 4.5 per cent in 2013 from over 9 per cent last year.
Hitting the target will depend on tax measures bearing fruit in the last quarter to compensate for higher debt financing costs and unemployment and pension payments, said Mr. Linde. Spain's economy fell back into recession at the end of 2011 and one in four Spanish workers is out of a job.
Mr. Linde also told parliament the outlook for growth in coming quarters was not favourable.
However, talking to journalists after the speech he said it was not impossible for deficit targets to be met this year and that recent economic data was moving in the right direction.
That was more in line with recent statements by the government, which insists it is on target to meet its goals.
Treasury Minister Cristobal Montoro said on Wednesday the central government should meet targets this year for its own deficit, which does not include the social security or pension systems.
The EU's top economics official Olli Rehn said last week Spain had taken effective action to address its 2012 and 2013 deficits, and would meet this year's target for its structural deficit even if it misses the goal in nominal terms.
The structural deficit, which strips out one-off revenues and expenses, such as the cost of injecting capital into Spain's ailing banks, and the effects of the business cycle on state income and spending, is set to reach 7.3 per cent of GDP in 2012.
Mr. Linde said financing conditions in Spain continue to be restrictive, cramping spending by households and businesses needed for growth, despite a fall in Spain's own borrowing costs since the European Central Bank said it would buy bonds of struggling euro zone states that ask for help.
Prime Minister Mariano Rajoy has so far held off from requesting aid that would trigger the ECB program, designed to keep open access to capital markets at a reasonable cost.
On Wednesday, Mr. Linde also warned that ECB monetary policy, both in the form of interest rates and liquidity measures, must be used with policies that address underlying problems in the euro area in order to be effective.
"The roots of the current crisis in the euro area are not of a monetary nature and, consequently, monetary policy alone cannot resolve those problems," he said.
Spain's borrowing costs remain at high levels although it has managed to cover all its financing needs for this year and will make a head start on 2013 funding on Thursday with a triple bond auction.
The Treasury has financing needs of €207-billion in 2013 compared to €186-billion this year, according to the budget draft currently under discussion in Parliament.
Markets' reluctance to lend means Spain's 17 regions are likely to rely on Madrid for cash through next year, however, with some estimates pointing to additional needs of over €40-billion. The government said on Wednesday the regions must tell it of their 2013 financing needs by December 3.
The difference in yield between its 10-year bond and equivalent German bunds, viewed as the lowest-risk asset in the euro zone, was around 430 basis points on Wednesday, down from record highs above 650 bps hit in July.
Mr. Linde also urged the government to be cautious when forecasting its likely income for next year.
Spain's government has stuck to its prediction that the economy will contract by half a percentage point next year but most private economists expect output to shrink by three times that amount – 1.5 per cent.
"The achievement of targets set for 2013 could be in danger if tax income is affected by slower-than-expected economic activity," the central bank governor said.
Asked by reporters if a hike in pension payments for next year in line with inflation would put deficit targets at risk, Mr. Linde responded: "If there are measures that raise spending there have to be other measures to reduce spending elsewhere."
The government has yet to decide whether it will raise pensions this year as in the past, but Treasury Secretary Marta Fernandez Curras said earlier on Wednesday there was room in the budget for an increase to meet inflation.
Mr. Linde said reforms already undertaken by the government, including changes to labour laws giving firms more flexibility over hiring and firing, would help the economy.
By 2014 Spain would have recovered almost all the competitiveness it had lost between 1998 and 2008, he added.