IANS/EFE | 25 Jan, 2012

Spanish gross domestic product will contract 1.7 percent this year and the country is set to run a budget deficit equivalent to 6.8 percent of GDP, the International Monetary Fund said Tuesday in its latest global projections.

In its previous forecast, the IMF said Spain's economy would grow 1.1 percent in 2012.

The new report calls for a "mild recession" in the 17-member euro zone as a whole, with GDP shrinking by 0.5 percent, while heavily indebted Italy is expected to see its economy contract 2.2 percent.

The IMF has also grown more pessimistic about Spain's efforts to trim its deficit and now predicts a shortfall of 6.8 percent of GDP this year and 6.3 percent in 2013, up from 5.1 percent and 4.4 percent, respectively, in the Fund's September forecast.

Even so, the IMF hailed the "substantial" spending cuts and tax increases adopted by Spain's new conservative government in an effort to bring down the budget deficit.

Both Italy and Spain - the euro zone's No. 3 and No. 4 economies - will remain in recession in 2013, though the area as a whole is projected to grow 0.8 percent next year, the IMF said.

"(T)he world could be plunged into another recession", if the crisis in Europe intensifies, the IMF's chief economist, Olivier Blanchard, said Tuesday at a press conference in Washington.

He urged European leaders to confront the sovereign debt problem through an accommodative monetary policy, the creation and strengthening of "firewalls," bank recapitalization and measures to support economic growth.