June 6 ()
The International Monetary Fund (IMF) has revised its growth forecast for the Spanish economy in 2024 five tenths upwards, which it now estimates at 2.4%, while maintaining the forecast for 2025 at 2.1%, the same as by 2026, as reported by the multilateral institution at the end of its visit to the country within the framework of ‘Article IV’.
In this way, the IMF has highlighted the “solid and continued” performance of Spain in 2023, which grew by 2.5%, and which has now demonstrated “remarkable resistance” in the face of global uncertainty and the tightening of financial conditions.
The organization led by Kristalina Georgieva has explained that the behavior of service exports has been “solid” and that, together with public consumption, they have been the main drivers of recent growth. For its part, the labor market has maintained its “good results”, particularly thanks to the influx of immigrants and the increase in the activity rate.
However, despite its most recent rebound, investment remains below late-2019 levels, and this weakness has contributed to low productivity growth, according to the IMF. Furthermore, despite the “significant” decrease in the unemployment rate, it remains the highest in the eurozone.
Regarding prices, the IMF has stated that general inflation has fallen “considerably” from its maximum in 2022 and the underlying variable has also followed a downward trend supported by the continued transmission of energy disinflation to commodity prices. processed foods and non-energy industrial goods.
Despite the “rigidity” of the labor market, the IMF has pointed out, wage pressures have remained “contained”, in part, due to the low prevalence of formal indexation clauses and the guidance provided by the wage agreement reached in May 2023 at the national level.
For all these reasons, the IMF predicts that Spanish growth will reach 2.4% in 2024, four tenths more than the Government’s estimate, and 2.1% in 2025 (two tenths more than Spain’s forecast), supported, mainly, due to the greater growth of domestic demand.
“Private consumption is expected to strengthen as the household savings rate gradually normalizes and real wage incomes continue to rise steadily,” the report elaborated.
Likewise, private investment will benefit from the relaxation of financial conditions and the disbursement of ‘Next Generation’ (NGEU) funds. The IMF has anticipated that both headline and core inflation will continue to decline throughout 2024-25 and will approach the 2% target set by the ECB before mid-2025.
DOWNWARD RISKS DUE TO POLITICAL FRAGMENTATION
Uncertainty around the outlook has leveled out, but risks remain tilted to the downside for growth and to the upside for inflation.
Thus, risks to growth lie in domestic political fragmentation, possible underutilization of NGEU funds, a global slowdown and geoeconomic fragmentation. Risks to inflation would be a possible rebound in global energy prices and a faster-than-expected rise in unit labor costs.
FISCAL CONSOLIDATION AND TAX REFORM
In their statement, IMF technicians highlight the “great resilience” shown by the Spanish economy and labor market, which has “favorable” prospects. In this context, it has been urged to maintain macroeconomic stability and address Spain’s structural challenges in order to promote the convergence of the country’s living standards with those of more developed nations.
The IMF technical staff has celebrated the “continued improvement in public finances and the authorities’ commitment to fiscal discipline” despite the difficult political environment.
The IMF has stated that in the coming years a “sustained” and “favorable” fiscal consolidation for growth will be necessary, which must be supported by an “explicit fiscal plan” in the medium term. This should reduce tax inefficiencies and broaden the tax base in order to rebuild fiscal reserves and keep debt on a downward trajectory.
Likewise, he has stressed the need to guarantee that extraordinary taxes on banks and energy companies, if they become permanent, are “appropriately” designed to minimize possible distortions. The sustainability of the pension system must also be guaranteed.
On the other hand, the strength of the financial system has been highlighted, although it has opted to increase anti-crisis buffers.
REDUCE THE DUALITY OF THE LABOR MARKET
Likewise, the IMF has indicated that the duality of the labor market must be reduced and its active and passive policies must be more adequately integrated. He has also mentioned the need to “carefully” design future labor market policy initiatives to avoid any undesirable effects on employment and growth.
Finally, the IMF has recommended optimizing the use of European funds, among other things, by improving coordination between administrations and with reforms and investments that increase productivity. The technicians also pointed out that boosting the supply of housing is “key” to improving its affordability.
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