December 14, 2016 / 10:01 AM / a year ago

Bank of Spain sees elections, Brexit as main risks to growth

MADRID (Reuters) - Elections in major European countries and Britain’s plan to leave the European Union pose the greatest potential risks to economic growth projections in Spain, its central bank said on Wednesday.

Uncertainties over economic policies worldwide, especially in the United States, could have a negative effect on the global economy due to their potential impact on financial markets and global trade, the Bank of Spain said.

The euro zone’s two largest economies, France and Germany, hold elections in 2017, and the third largest, Italy, may do as well. Donald Trump’s surprise election to the U.S presidency has raised concerns of sharp changes in economic direction.

The central bank said economic policy risks in Spain had reduced since its last forecasts in September after Prime Minister Mariano Rajoy was reinstated following 10 months without a fixed government and two inconclusive elections.

Fiscal consolidation remains a priority, to offset vulnerabilities in the Spanish economy, the bank said.

Spain has one of the largest budget deficits in the European Union, though Rajoy’s government has pledged tax hikes to help bring that down to 3.1 percent of economic output in 2017 from a projected 4.6 percent this year, in line with EU demands.

The Bank of Spain was more optimistic than the government for this year, saying it saw a deficit of 4.4 percent of GDP, down from 5.1 percent in 2015. However, it expected a miss for the 2017 target, with a deficit of 3.6 percent, and another miss in 2018 with a deficit of 3.2 percent.

Spain narrowly dodged EU sanctions this year after missing last year’s deficit target, and could face action from Brussels if it fails to show its working to reduce the shortfall.

The central bank raised its GDP growth projections for Spain, saying it saw it at 3.2 percent this year and 2.5 percent next, in line with the government’s projections.

The bank saw growth of 2.1 percent by 2018 and 2.0 percent in 2019, below the government’s forecast of 2.4 percent for both years.

On unemployment, the second highest in the European Union after Greece at 18.9 percent, the bank saw the rate dropping to 14.5 percent by the end of 2019 compared to the government’s own forecast of 13.8 percent.

Reporting by Paul Day; Editing by Jesus Aguado and Robin Pomeroy

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