The economy will contract 1.5 percent this year and will experience a "modest" recovery in 2014, when the gross domestic product will expand by 0.60 percent, the Bank of Spain said Tuesday.
The drop in the GDP this year will lead to a "notable reduction" in employment of 3.8 percent, pushing the unemployment rate higher, the central bank said in its latest bulletin.
Net job creation will begin in 2014, leading to "slight" improvement in the unemployment rate, which hit 26.02 percent in 2012, the Bank of Spain said.
The budget deficit will be around 6 percent both this year and in 2014, indicating that "the magnitude of pending fiscal adjustment is still significant" despite the "intense" efforts already made to cut spending, the central bank said.
Domestic spending is expected to fall 4.3 percent this year after dropping 3.9 percent in 2012, the Bank of Spain said, adding that consumer spending would drop up to 3 percent in 2013 because of weak wages.
Investment in housing will fall for a sixth straight year and is likely to drop more than in 2012, plummeting up to 10 percent, the central bank said.
Spain has been battered by an economic meltdown caused by fallout from the global financial crisis and the bursting of the real estate bubble at the end of the past decade. EFE