Madrid, Jan 24 (IANS/EFE): The Spanish economy will contract 1.5 percent and unemployment will climb to 23.4 percent, the country's central bank said Monday.

While predicting a "modest recovery" in 2013, with a 0.2 percent expansion in gross domestic product, the Banco de Espana said the jobless rate is likely to remain above 23 percent until sometime in 2014.

Spain's economy will begin to register net gains in employment in mid-2013, the central bank said in its latest bulletin.

Spanish GDP grew only 0.7 percent last year after shrinking 0.3 percent in the fourth quarter, compared with the 1.3 percent expansion forecast by the Socialist government that left office in December.

The economy minister in the new conservative administration, Luis de Guindos, said late last month that GDP would continue contracting in the first quarter of 2012.

The Banco de Espana said its gloomy forecast for 2012 is based on a "sharp decline" in domestic demand, even as Spanish exports are projected to increase 3.5 percent this year.

The central bank's forecast takes into account the likelihood that the Popular Party government will adopt additional austerity measures to meet its deficit-reduction targets.

Further "fiscal austerity is unavoidable, given that the costs of not doing so would be very high", the Banco de Espana said, noting that Spain ran a cumulative public deficit last year equivalent to 8 percent of GDP.

Prime Minister Mariano Rajoy's administration wants to reduce the deficit to 4.4 percent of GDP this year and to 3 percent of gross domestic product in 2013.