The Spanish economy, the eurozone's fourth largest after Germany, France and Italy, will shrink by 1.5 percent this year, after contracting 1.4 percent last year, before posting a "modest rebound" in 2014 with growth of 0.6 percent as private demand recovers, the Bank of Spain said in its latest bulletin.
Prime Minister Mariano Rajoy's conservative government had predicted gross domestic product (GDP) would contract by a more modest figure of 0.5 percent this year and grow by 1.2 percent in 2014 but last week it said it would have to revise its forecast.
Spain is facing a double-dip recession not having fully recovered from the collapse of a decade-long property boom in 2008.
"The significant drag effect, resulting from the sharp decline in economic activity at the end of 2012, means that despite the progressive improvement in quarterly rates of GDP, the forecast for all of 2013 is for a contraction that is slightly greater than the one registered last year," the Bank of Spain said.
The Spanish economy contracted 0.8 percent in the final quarter of 2012, the steepest decline since the second quarter of 2009 and more than double the 0.3 percent fall posted in the previous three-month period, as households cut back on spending.
The central bank forecast that Spanish unemployment, among the eurozone's highest, would rise to 27.1 percent of the workforce by the end of this year before dropping to 26.8 percent in 2014.
Spain's jobless rate stood at a record 26.02 percent in the final quarter of last year and averaged 25 percent during all of 2012.
The central bank predicts Spain will end 2013 with a public deficit equal to around 6.0 percent of the country's economic input, down from 6.7 percent last year but above the target of 6.3 percent agreed with the European Commission.
The government has promised to reduce the deficit to 4.5 percent in 2013 and to 2.8 percent in 2014 but the European Commission predicts the Spain's deficit will be of 6.7 percent this year and 7.2 percent in 2014.
Rajoy's conservative government has put in place steep spending cuts and tax rises, aimed at saving €150 billion euros between 2012 and 2014, which have prompted mass street protests.