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ECONOMY

OECD improves its outlook for Spanish economy

Paris-based agency sees slightly higher growth and lower unemployment next year

Agencies
Madrid -

The OECD on Tuesday revised its forecast for the Spanish economy but warned that a dearth of lending and the government’s need to pursue further fiscal consolidation would condition the pace of the recovery.

In its latest Economic Outlook report, the Organisation for Economic Co-operation and Development now sees the economy growing 0.5 percent in 2014, up from a previous estimate of 0.4 percent, but below the government’s growth forecast of 0.7 percent. It revised its estimate for this year from a contraction of 1.7 percent to a decline of 1.3 percent, in line with the government. It sees GDP being boosted by 1.0 percent in 2015.

This moderate growth will translate into slightly lower rates of unemployment. The OECD now sees the jobless rate for this year at 26.4 percent, down from a previous forecast of 27.3 percent and at 26.3 percent next year, a significant improvement on its previous estimate of 28 percent. The jobless rate is expected to ease further in 2015 to 25.6 percent.

“Improving growth in export markets, gains in market share and the stabilization of private domestic demand will help to foster a weak recovery in 2014 and 2015,” the OECD’s report said. “However, fiscal consolidation and tight credit conditions will remain a drag on growth.”

In line with a report issued on Monday by the European Commission, the OECD, while attributing weak lending to soft demand, also pointed to the fact that interest rates on new loans to small-to-medium-sized enterprises “have risen substantially” despite lower borrowing cost for banks, suggesting restrictions in the supply of credit.

The recovery is real, but at a slow speed, and there may be turbulence on the horizon”

The OECD also predicted that Spain would fail to meet its deficit-reduction targets. It predicts a shortfall of 6.7 percent this year, 6.1 percent next year and 5.1 percent in 2015, compared with the respective figures agreed between Madrid and Brussels for the next three years of 6.5, 5.8 and 4.2 percent.

“With a recovery in sight but the economy still fragile, the government needs to pursue its structural fiscal consolidation path, but also allow automatic stabilizers to operate fully,” the OECD said.

The agency also urged the government to introduce more active measures to tackle “extremely high structural and youth unemployment,” suggesting that employers be invited to play a more active role in this.

The OECD is also predicting a return to moderate growth in the Portuguese economy, where GDP is expected to grow 0.4 percent next year, less than half the government’s forecast of 0.8 percent. This will pick up to 1.1 percent in 2015, also below the government’s estimate of an increase of 1.5 percent. The contraction this year is expected to come in at 1.7 percent, slightly more optimistic than the government, which sees a contraction of 1.8 percent.

As in the case of Spain, higher growth should translate into lower unemployment, which is seen at 16.7 percent this year, 16.1 percent next year and 15.8 percent in 2015.

“As global conditions improve and domestic demand recovers, growth should resume slowly,” the agency said.

The OECD also forecast the government would find it challenging to come to grips with the budget deficit, which is forecast at 5.7 percent of GDP for this year, 0.3 points more than agreed with the IMF and the European Commission under the terms of Portugal’s 78-billion-euro bailout. For next year, the OECD sees a shortfall of 4.6 percent against a target of 4.0 percent and 3.6 percent in 2015, compared with a goal of 2.5 percent. However, it warned about overdoing the austerity drive in order to avoid a negative growth spiral.

For the euro zone as a whole, the OECD expects a contraction of 0.4 percent in GDP for this year, returning to growth of 1.0 percent next year and accelerating to 1.6 percent in 2015. The global economy is expected to expand at a moderate pace over the next two years.

“The recovery is real, but at a slow speed, and there may be turbulence on the horizon,” the secretary general of the OECD, Angel Gurría, said at a presentation of the report in Paris. He pointed to the risk of a further round of political brinkmanship in the United States that forced the government to close down this year and possible instability from a tapering off of quantitative easing by the US Federal Reserve.

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