Spanish recession to hit harder than expected with bigger GDP contraction, says IMF

In its latest forecast on the Spanish economy, the International Monetary Fund on Friday predicted that Spain will suffer a much tougher recession than previously expected. The Washington-based lender concluded in its latest survey that the “economic outlook remains very difficult and vulnerable to significant downside risks.”

Among the factors for the negative forecast are “fiscal retrenchment,” high unemployment, ongoing deleveraging in the private sector, and heightened market tensions.

The IMF predicts that GDP in Spain will contract this year by 1.7 percent, down 0.2 percentage points from its previous predictions about two weeks ago. Forecast figures for domestic demand showed a big drop to -4.1 percent — its biggest fall since 2009 — from -1.7 percent in 2011. By the end of the year, the IMF believes that unemployment will close at 24.9 percent — about 0.3 percentage points higher than second-quarter figures released Friday.

IMF directors commended the Rajoy government for the measures that he has so far taken, saying that they are improving the imbalances, especially regarding the deficit, inflation and unit labor costs. They also welcomed Brussels’ move to help recapitalize Spanish banks, which may need up to 100 billion euros to offset their bad housing loans, and encouraged the EU to allow direct recapitalization through the European Stability Mechanism, because it “would help break the adverse feedback loops between the sovereign and banks, and have positive spillover effects for the wider euro area.”