The International Monetary Fund (IMF) has substantially cut its growth expectations for the Spanish economy in 2021 and 2022, reducing the expected expansion of GDP this year to 4.6% from the 5.7% anticipated last October, while that for the next fiscal year, the rebound in activity is expected to be limited to 5.8%, six tenths lower than previously expected. “Production remains below its pre-pandemic level, in part due to the persistent impact of the pandemic on intensive personal contact sectors and bottlenecks in global supply chains,” the Fund notes in its report. about Spain at the end of the year.
The document published this Wednesday highlights that uncertainty is “high” and the evolution of the pandemic “continues to be one of the main risks.” “The pace of recovery will also depend on the duration and magnitude of the disruptions in supply chains,” added the IMF in its conclusions on the mission in Spain. The rate of release of savings accumulated by households and the rate of absorption of European funds will determine the speed of the economy’s recovery in the coming years.
Despite the cut, the IMF raises certain acknowledgments to the Spanish management of the crisis. First, it points to support policies that have been “timely and decisive”, which have made it possible to protect jobs, household income and company balance sheets. To this he adds that the vaccination campaign in Spain has been “extremely effective”, which has made it possible to limit the impact of infections in hospitalizations and in economic activity itself. Third, he points out that employment has rebounded “vigorously and has already exceeded pre-crisis levels.”
The report issued with just one week left for the end of the year indicates that private consumption is expected to continue to be the engine of growth in the short term thanks to the improvement in the labor market and the normalization of household savings. The IMF believes that investment will take hold in 2022 as bottlenecks in supply chains and the rapid deployment of European funds disappear. These funds will contribute between 1.5 and 2 points of growth in GDP for next year. To this will be added that as vaccination rates in the world increase, international tourism will recover. Of course, inflation will foreseeably remain at the start of next year, due to high energy prices. The moderation would come in the second half of the year.
The IMF has supported the general lines of the labor reform in Spain by having “well identified” the priorities. Specifically, it points out that the duality of the labor market must be addressed, flexibility improved and the effectiveness of active employment policies improved. Regarding this last aspect, he points out that the measures proposed in the new Employment Law “seek to modernize active employment policies.” In order for them to work, he says, they must have “close collaboration with the private sector.” Regarding the duality of employment in Spain, the IMF indicates that the use of temporary contracts for permanent jobs should be discouraged and adds that it would be important to make permanent contracts “more attractive”, for which it asks “to reduce the legal uncertainty related to the dismissal of permanent workers “.
The IMF has joined the messages sent by the Bank of Spain about the wage increase in a context of rising inflation that the different organizations consider temporary. “It is important that wage negotiations continue to internalize the transitory nature of the current drivers of inflation and avoid a vicious cycle of higher wages leading to higher inflation,” said the report released Wednesday.
The Fund goes on to assess in its report the steps that have been undertaken in the pension reform in Spain, ensuring that “social acceptability and sufficiency” have been prioritized, however, it maintains that “concern about sustainability persists in case no additional measures are implemented “. Thus, the IMF points out that “additional efforts” are necessary to counteract the pressures of pension spending, which would also “help to give a signal of the authorities’ commitment to fiscal responsibility.” It suggests that the two alternatives to improve this sustainability would be to extend the working life of workers or increase the maximum income subject to contributions. He hopes that they will be implemented in the second phase of the reform, in the next year.
Urges fiscal consolidation
Although the IMF recognizes that fiscal policies have made it possible to protect companies and workers, it points out that the large debt has become a source of “vulnerability” for public accounts in Spain. The report indicates that it will be necessary to maintain some of the support measures that have been applied, although they should now focus on the most vulnerable. At the same time, the IMF urges the government to undertake a “sustained and gradual process” of fiscal consolidation as the economy achieves sustained growth. “The fiscal adjustment should favor growth, for which it will be necessary to preserve the margin for public investment and spending on education, and complement the process with structural reforms that promote growth,” the report adds.
The analysis carried out by the IMF in fiscal matters contemplates that the Government moves towards an increase in the fiscal pressure, to get closer to other European economies, increasing the tax bases and environmental taxes. For this reason, he believes that the document being prepared by the experts for the tax reform “will make a valuable contribution to these issues.” In addition, it requests a policy of “rationalization” of spending with improvements in efficiency, following the indications set by the Independent Authority for Fiscal Responsibility (Airef).
The report on the situation of the Spanish economy also has a message for the banking sector. The IMF considers that the capital buffers that Spanish banks have are “adequate”, but that a “close monitoring” is needed. Thus, it asks financial institutions for prudence in maintaining the provisions made by COVID-19 since difficulties among their clients may arise with a “delay” as support measures are lifted. Thus, it points out that dividend distributions and share buybacks should continue to be evaluated “case by case” bearing in mind that uncertainty remains. If these risks disappear, the IMF urges banks to use this capital buffer to avoid “undue tightening of loan conditions.”
Finally, the IMF analysis also addresses the preliminary draft of the housing law that the Government is processing and that must be agreed by the partners of the executive. The Fund believes that “continued efforts” to address the problem of housing affordability would promote “growth, facilitate labor mobility between regions and reduce inequality.” However, he considers that installing ceilings on rent increases in stressed areas “can introduce inefficiencies and restrict the availability of real estate.” It does support a greater burden on empty homes or subsidies for renting vulnerable groups. “They should help ease the pressures on the rental market,” he adds. The IMF encourages “simplifying the regulations on land use and speeding up the permitting processes of the autonomous governments.”