The Organisation for Economic Co-operation said in its latest economic outlook on Wednesday, that the Spanish economy is expected to contract by 4.2 per cent this year. The OECD’s prediction was gloomier than that of the IMF and the Bank of Spain which both expect GDP to contract by 3 per cent this year.

The latest report from the OECD sees GDP contracting well into 2010, albeit at a slower pace, 1 per cent. Inflation is expected to fall to near zero and unemployment rate will reach 20 per cent in 2010.

Spain’s public deficit is also in the spotlight, given that the OECD expects it to reach 9.6 per cent of GDP in 2010 while the government’s own estimates point towards 9.5 per cent.

The OECD also took note of the growing unemployment crisis in Spain, which hit 17.4% in May, stating that the cost of making a long-term employee redundant in Spain is among the highest in the world, and a disincentive to make permament hires during the crisis.

The global forecasts made by the OECD point toward the deepest global recession in 60 years approaching a bottom, but recovery will be weak due to uncertainty over bank’s balance sheets.