The IMF raises its growth forecast for Spain in 2022 to 5.2%, but lowers that of 2023 to 1.1%

It highlights the positive initial effects of the labor reforms and calls for monitoring the impact on credit of the temporary tax on banks

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The International Monetary Fund (IMF) has significantly raised its GDP growth forecast for Spain in 2022, which rises to 5.2% from 4.6% last November, although it has cut the projection by one tenth for this year, when it expects an expansion of 1.1%, according to the projections included in the conclusions of the directory on the consultations for the ‘Article IV’ report on the Spanish economy.

According to the international institution, the slowdown in growth projected for Spain in 2023 compared to last year “reflects the effects of high energy and food prices, tighter financial conditions, and weaker external demand.”

In this way, the IMF anticipates that activity will reach its pre-pandemic level at the beginning of 2024, when it expects GDP to grow by 2.4% and at a rate of 2.2% in 2025.

Regarding inflation, the institution calculates an average rise in prices in 2022 of 8.4%, which will moderate this year to 3.7% and 2.7% in 2024, standing at 2.1% in 2025.

However, taking into account the data at the end of the year, for 2022 it estimates inflation of 5.8%, which will drop to 3.8% at the end of 2023 and to 2.4% a year later, to stand at 2%. at the end of 2025.

In this sense, the IMF recalls that the high inflation in 2022 was largely caused by the increase in energy prices and the persistent supply restrictions, highlighting its drop to 5.8% at the end of 2022 due to the drop in gas prices in Europe and the impact of energy support measures.

However, it warns that core inflation remains above 6% due to a gradual pass-through of higher energy costs to a wider price range and, possibly, a decrease in idle capacity in the economy, although stresses that wage pressures have so far been contained.

Likewise, the IMF expects that the unemployment rate, which stands at 12.8% in 2022, will remain stable in 2023 to drop to 12.5% ​​next year and to 12.3% in 2025.

On its side, public debt will be 112.1% of GDP in 2023, after closing 2022 at 112.8%, to drop to 110% next year and to 109% a year later.

The executive directors of the IMF praised the economic resilience of Spain and the solid performance of the labor market in the context of successive ‘shocks’, collects the document published by the entity.

However, they noted that the outlook is subject to great uncertainty given Ukraine’s vulnerability to war spillovers, weaker global demand, tighter financial conditions and high energy prices.

In this context, they underscored the importance of carefully calibrated and flexible macroeconomic policies, as well as a strong implementation of the structural reform agenda to support sustainable and inclusive growth.

TIMELY MEASURES AND FISCAL CONSOLIDATION

In addition, IMF directors highlighted the “timely policy” of the Spanish authorities to help households and businesses deal with rising energy prices, welcoming recent steps towards better targeting and better preservation. of the price signals in the support package approved for 2023.

Thus, they considered that continued progress to overcome dependence on fossil fuels is necessary in the medium term.

On the other hand, they highlighted the improvement in Spanish public finances since the pandemic and welcomed the moderately contractionary fiscal stance foreseen in the 2023 budget.

In this regard, they emphasized that “a gradual and sustained fiscal consolidation” will be necessary in the coming years, backed by a medium-term consolidation plan, to create space to respond to future shocks, while they pointed out the importance of adopting measures additional to preserve the sustainability of the pension system.

POSITIVE RESULTS OF LABOR REFORMS

Likewise, the IMF board acknowledges the “positive initial results” of recent labor reforms, with a significant proportion of workers switching from temporary to permanent contracts.

However, they point to the importance of continuous monitoring to assess the effectiveness of the reform and the need to renew active labor market policies to improve the efficiency of job matching and address skills mismatches.

On their side, they welcomed Spain’s progress in the Recovery, Transformation and Resilience Plan and the acceleration of the execution of the Next Generation EU (NGEU) funds, which should reduce barriers to productivity growth.

In this regard, they stress that it will be crucial to establish a system of regular, data-driven and results-based evaluation of reforms and underline that, to ensure effective use of NGEU funds, there is a need to improve coordination across all government levels and with the private sector, and improve the collection and reporting of performance data.

BANK TAX

Regarding the situation of the financial sector in Spain, the IMF board of directors considers that up to now it has resisted the pandemic and the consequences of the war in Ukraine well.

However, given the deteriorating macroeconomic outlook and rising interest rates, it warns that borrowers’ ability to repay is likely to erode, so they ask banks to remain forward-looking in their assessment. of the quality of the loans and that they maintain adequate levels of provisions.

Likewise, they also emphasized the need to closely monitor the impact of the new temporary tax on the banking sector on the provision and cost of credit.