IMF improves growth forecasts for Spain but raises its estimate for unemployment

The International Monetary Fund on Tuesday revised upwards its growth forecasts for Spain for this year and the next but predicted that the labor market would continue to deteriorate.

The IMF’s estimate for Spain’s GDP for this year was improved from a contraction of 1.6 percent to a decline of 1.3 percent, in line with the government’s forecast. For next year it expects output to grow 0.2 percent, compared with a previous forecast of zero growth. The Popular Party government in Madrid estimates GDP will advance 0.7 percent in 2014.

However, the multilateral agency sees little relief for the almost six million people who remain out of a job in Spain, predicting that the country’s jobless rate would come in at 26.9 percent this year and at 26.7 percent next year, the latter figure actually having risen from a previous forecast of 26.5 percent.

While Spain looks set to emerge from its second recession in four years, it seems that it could take another five years to recover the levels of output seen in 2008. Despite the upward revision for GDP prospects, Spain remains close to the bottom of the growth table in the euro zone, only better off than Italy and Portugal where growth is expected to contract 1.8 percent, Greece, where GDP is forecast to decline 4.2 percent, Slovenia with a fall of 2.6 percent and Cyprus, whose output is seen shrinking 8.7 percent. The IMF expects Italy to surpass Spain next year, with GDP growth of 0.7 percent.

“The recovery will be fragile and very tenuous,” Economy Minister Luis de Guindos said Tuesday. De Guindos will be in New York this week to meet with investment funds to try and convince them as to the merits of investing in Spain before joining the IMF’s annual meeting in Washington over the weekend.

In order to boost the recovery, the IMF insists that Spain needs to continue with internal devaluation by cutting wages in order to boost competitiveness. In a report issued in the summer, IMF experts proposed a pact between the government, business and labor unions under which salaries would be cut 10 percent in exchange for a commitment from companies to create jobs. It also suggested that company Social Security contributions should be cut and for revenues from value-added tax to be raised by increasing the range of products subject to the standard rate as opposed to the reduced rate,

The Fund’s proposals should be put in the context of the fact that according to a study by La Caixa, real wages (taking inflation into account) have fallen 7 percent since 2010 without any accompanying increase in hiring. The reduction in wage costs has helped to boost exports in Spain, although insufficiently to create jobs and offset weak domestic demand this year.

The IMF also believes that Spain’s outstanding public debt will continue to swell from 100 percent next year to 110.6 percent in around 2018. The main reason behind that is that the agency believes the public deficit will remain at 5.5 percent in 2018, compared with a government target of 2.8 percent in 2016.