IMF now sees Spanish recession extending into next year

Agency expects GDP to decline 0.6 percent in 2013 Risk premium rises on first day of trading after Cabinet approves austerity measures

The IMF on Monday came into line with other experts in predicting the Spanish economy would remain in recession next year when its performance is expected to be the worst of the major developed countries.

The Washington-based agency now estimates Spain’s GDP will shrink by 0.6 percent in 2013 when it had previously forecast a timid recovery of 0.1 percent. The only other major economy expected to remain in negative territory is Italy whose output is forecast to contract by 0.3 percent. By contrast, the IMF sees growth in global output of 3.5 percent this year and 3.9 percent in 2013, while the euro zone is expected to shrink 0.3 percent this year before returning to growth of 0.7 percent the following year.

However, the International Monetary Fund improved its forecast for the decline in GDP this year to 1.5 percent from 1.8 percent previously, compared with the Madrid government’s estimate of a contraction of 1.7 percent. However, the IMF said its revised forecast did not take into account the recessionary impact of the latest batch of austerity measures approved by the government of Prime Minister Mariano Rajoy, which include 66 billion euros in spending cuts and tax hikes over the new two-and-a-half years.

The IMF sees activity declining at a rate of 2.3 percent at the end of this year before touching bottom around the start of next year and initiating a gradual recovery, with output growing on an annual basis at 0.6 percent in the final quarter of 2013. The agency’s predictions for the public deficit lose significance in that they do not reflect the latest belt-tightening measures. It predicts a shortfall of seven percent this year, but the Rajoy administration’s austerity drive should shave 1.3 percentage points off the deficit this year and almost 2.2 points off the shortfall for 2013, allowing revised targets for the next two years to be met.

Outstanding public debt is expected to rise to 90.3 percent of GDP this year, but again the figures do not include the latest austerity measures nor up to 100 billion euros from the EU bank bailout program.

The IMF also recommended the European Central Bank reactivate purchases of government bonds of countries under pressure such as Spain and Italy in the secondary market.

The blue-chip Ibex 35 index closed down 1.99 percent at 6,532.10 points, while the risk premium climbed 18 basis points to 558.

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