Gloomy OECD forecasts add pressure on Spain to step up reforms

Spain's jobless rate is set to hit 28 percent next year and its deep recession shows no sign of ending, the OECD group of wealthy countries said on Wednesday, adding pressure on Madrid to step up economic reforms.

The Organisation for Economic Co-operation and Development forecast the Spanish economy will contract by 1.7 percent this year, more than initially expected and also worse than a government forecast of a 1.3 percent slump.

It also said Spain, under current policies, would likely miss its public deficit targets this year and next, while the country's debt would rise to close to 100 percent of economic output in 2014.

European authorities are expected later on Thursday to grant Madrid more time to hit its deficit goals provided it refocuses on pushing though planned economic reforms.

The new OECD figures deal a blow to the official message that Spain is on the road to recovery thanks to a quick correction of the country's traditionally big trade deficit, the reduction of its fiscal gap and a drop in labor costs.

"The recession in Spain is projected to continue in 2013 as fiscal consolidation and high private sector indebtness undermine domestic demand," the OECD said in the report.

While acknowledging that growth in trading partners countries and cost competitiveness gains should help the country return to growth in 2014, the OECD also slightly cut its GDP forecast for next year to 0.4 percent.

It said Spain's economic situation remained highly dependent on policy decisions being taken at a European level.

Prime Minister Mariano Rajoy on Tuesday urged European institutions to do more to help credit flow to small businesses and said the euro zone should not fall behind on building up the banking union agreed last year.

He, in return, will be put under increased pressure when the European Commission release recommendations to correct economic imbalances in the Spanish economy.

The EU executive is expected to call on Spain to review its labour reform, speed up public pension reforms, streamline its administration and move to correct its energy tariff deficit.

The measures are part of a national program of reform agreed with Brussels, but EU officials are concerned Spain may be dragging its feet over implementing them.

(Reporting by Julien Toyer; Editing by Fiona Ortiz, John Stonestreet)