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A clash of forecasts

After the IMF’s revisions, the government should explain its belief in a recovery in 2014

The revised forecasts by the International Monetary Fund (IMF) regarding the Spanish economy’s expected performance in 2013 and 2014 diverges conspicuously from the estimates of other international organizations and private sector think-tanks. Back in April, the IMF figured that the Spanish economy would experience growth of 0.7 percent in 2014, yet its new figures show activity stagnating next year, with no change in GDP. While the Paris-based Organization for Economic Co-operation and Development, the Bank of Spain and the European Commission believe that the Spanish economy will next year return to the path of growth — albeit modest but perceptible — the IMF is factoring in the paralyzing effects of pending public sector adjustments to rein in the fiscal deficit, and doubtless also the enormous amount of unemployment that remains an onerous drag on the domestic economy.

The point here is not to start a duel of forecasts and determine who is right and who is wrong. For the last few months, the idea has spread that Spain’s recovery will start in 2014, supported by the registered unemployment statistics and the government’s oft-repeated promises of upcoming improvement in the level of activity. That notion is nothing more than a probability that appears to be sustained by the belief that improved expectations ultimately result in an improved reality; but there are other, less favorable hypotheses to consider. One of them holds that the end of the recession will not manifest itself as a rebound from sharp GDP contractions to make way for slow but sustained growth, but that, after reaching rock bottom, there will still be several quarters of zero or nearly zero growth before GDP starts to rise again. And yet the IMF hypothesis, though contrary to the most widely accepted assessments by economic agents, does have some basis for truth.

The IMF’s chief economist, Olivier Blanchard, and his team know the models; they are familiar with the effects of persistent spending cut policies, and they observe with some concern the symptoms of economic sluggishness in the world and particularly in Europe. Today, it can be stated with relative assertiveness that the Spanish economy has touched bottom — that is to say, it has reached the minimum year-on-year GDP contraction rate in this period of the recession. But what is less certain is whether or not from now on the economy will return to a clear path of growth. The consensus among economists is that this will be so, but the IMF and the odd private-sector think-tank believe that might not be the case.

Policies to speed recovery

The correct attitude from the government, in this case, would be to maintain its own forecasts, explain the reasons why it considers them correct, and activate policies to speed up the recovery process. Until now, detailed explanations and new policies have been conspicuous by their absence. The economic team has simply placed its faith in the buoyance of the export sector and keeps repeating that “the reforms will start to take effect soon.”

Their response to the IMF’s dramatic revision of its forecasts — the equivalent to conveying to investors the idea that recovery will not take place before 2015 — was another act of faith: “We will outdo the forecasts.” As though this were a competition.

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