MADRID - Enormous economic challenges await Spain's newly re-elected Prime Minister Jose Luis Rodriguez Zapatero, confronted by a slowdown heralding the end of a long period of strong growth that has been the envy of the rest of Europe.
"The main challenge is growth, there is going to be less creation of wealth," economy professor Jose Villacis of CEU San Pablo University in Madrid told AFP.
Spain's economy has expanded for more than a decade, with gross domestic product rising 3.8 percent last year, well above the eurozone average of 2.7 percent.
The Socialist government, which boosted its seats in parliament in Sunday's general election but once again fell short of an absolute majority, predicts the economy will continue to grow above 3.0 percent in the coming years.
But last month Spain's central bank warned that recent data "shows a slightly more pronounced deceleration in (economic) activity in early 2008, in an environment in which tensions on international markets are intensifying."
The European Commission, the executive arm of the European Union, has cut its forecast for Spanish economic growth in 2008 to 2.7 percent, the slowest pace since 2002, from 3.0 percent previously.
The Spanish economy started to show signs of weakness late last year as the key building sector was hurt by the international lending crunch which put the brakes on a credit-fuelled expansion.
On the campaign trail Zapatero promised to dip into Spain's record budget surplus to weather the downturn by boosting spending on infrastructure and social programmes like state pensions, and offering tax relief.
Spain posted a record budget surplus last year, equivalent to 2.2 percent of GDP, but Villacis warned that "acting indirectly by raising disposable revenue, through a tax cut, is dangerous, it risks creating a budget deficit."
Zapatero told a news conference on Monday that he would seek an agreement between trade unions and employers to tackle the country's mounting economic problems, which include rising inflation and unemployment.
"We have four years of work ahead of us," he said.
State spending on unemployment benefits is set to increase.
In the past two years the country has produced a third of the new jobs in the 13 nations comprising the eurozone, according to calculations by London-based Lombard Street Research.
The unemployment rate dropped to 7.95 percent in the second quarter of 2007, its lowest level since 1978, but inched up to 8.6 percent in the last quarter, and the number of jobless continued to rise during the first two months of 2008.
Inflation meanwhile reached a peak of 4.4 percent in January, its highest level since January 1997, due to higher global prices for fuel and food which has eaten into wage packets.
"The only possible course of action (to make up for rising inflation) consists in working harder to compensate, through an increase in exports, the lost revenue," economy professor Josep Oliver Alonso of Barcelona's Autonomous University wrote in business daily Cinco Dias.
Zapatero has promised to create two million jobs and is targeting an unemployment rate of 7.0 percent in 2012.
The Socialists won 169 seats -- seven short of an absolute majority in the 350-seat parliament -- while the conservative Popular Party led by Mariano Rajoy captured 153 seats in polls marked by a high turnout.
In the outgoing parliament the Socialists had 164 seats.
fz/ds/mb
03/10/2008 14:49 GMT