The Spanish government yesterday slashed its economic forecasts for this year from growth of one per cent to a contraction of 1.6pc due to the global financial crisis.
It also warned of dark days ahead for Europe's fifth-largest economy.
Unemployment, already the highest in the European Union, will hit 15.9pc this year, worse than the 12.5pc forecast in July while the public sector budget deficit will clearly surpass the euro zone limit of 3pc of output in 2009, it said.
The government predicts the deficit will hit 5.8pc of gross domestic product this year instead of around 2.0pc as previously forecast.
"The financial crisis that exists at the moment at the global level has changed the scenario very drastically," Economy Minister Pedro Solbes said following a meeting which approved the new economic forecast.
The government estimates the economy expanded by 1.2pc last year compared to growth of 3.7pc in 2007. The collapse of a decade-long real estate boom due to oversupply, higher interest rates and the international credit crunch has spread to other areas, pushing the Spanish economy to the brink of its first recession since 1993.
Spain's unemployment rate hit 13.4pc in November, the highest in the 27-nation European Union, according to the bloc's statistics agency Eurostat.
The new government forecasts are in line with predictions for the Spanish economy made last year by the Washington-based International Monetary Fund (IMF) and the Paris-based Organisation for Economic Co-operation and Development (OECD).
The IMF predicts Spain's economy will shrink by at least 1pc this year while the OECD forecasts an economic contraction of 0.9pc.
Deputy Prime Minister Maria Teresa Fernandez de la Vega warned that "2009 will not be an easy year" but she predicted measures adopted by her socialist government to stimulate the economy will allow Spain to return to growth next year "in force."