OREANDA-NEWS. On July 27, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Spain.

Spain’s recovery has gathered speed, but unemployment is still very high. Growth has picked up and is expected at 3.1 percent in 2015 and 2.5 percent in 2016, well above the euro area average. Strong policy implementation has supported the return of confidence, and significant external tailwinds are helping the rebound. The current account maintains a small surplus while financial conditions remain supportive. The pace of private sector deleveraging has slowed and new credit is being extended. Job creation has picked up, but more than 5 million people remain unemployed and new jobs still rely heavily on temporary and part-time contracts.

Past reforms are contributing to the recovery. Spain’s labor market reforms and moderate wage growth have supported employment and helped regain competitiveness. The Market Unity Law has begun to address some of the obstacles for firms to grow and raise productivity. The positive report card from the European Central Bank’s comprehensive assessment confirmed that the country’s financial sector reform efforts have progressed well, supported by the European Stability Mechanism. These reforms, together with continued fiscal consolidation, have reassured markets and boosted consumer and investor confidence.

However, deep structural problems limit Spain’s growth potential going forward and vulnerabilities remain. The high structural unemployment and pervasive labor market duality, and the lack of economies of scale of Spain’s many small firms hold back medium-term growth. Public and private debt levels are still high and are likely to keep weighing on consumption and investment. Spain has a large negative net international investment position, which adds to its external vulnerabilities. In this context, a key risk is a reversal of reforms already carried out, which would create uncertainty and could hamper the recovery, especially if the external environment were to deteriorate sharply.

Executive Board Assessment

Executive Directors commended the authorities for their strong policy implementation and reform efforts, which, complemented by easier financing conditions, have enhanced confidence and underpinned Spain’s remarkable rebound from the crisis. They noted in particular that labor market reforms and wage moderation have boosted jobs and competitiveness. However, despite significant adjustments in key economic flows over the past few years, the persistently high level of unemployment, low productivity, and still sizable public and private debts continue to pose policy challenges for the period ahead.

Against this background, Directors emphasized that sustaining the growth momentum over the medium term requires continued fiscal consolidation and steadfast reforms to address remaining structural rigidities, as well as favorable demand conditions in the broader euro area. Financial volatility and uncertainty in the region warrant continued vigilance, although Spain’s improved resilience, along with policy measures at the euro-area level, has reduced contagion risks.

Directors saw merit in further improving the labor market and the conditions for small- and medium-sized enterprises (SMEs) to grow, with a view to generating jobs and fostering higher, more inclusive growth. They recommended keeping wages in line with productivity and business conditions at the firm level, lowering labor market duality, and strengthening the skills of the long-term unemployed. Directors welcomed initiatives to promote competition, especially in the services sector, support the internationalization of SMEs, and improve their access to finance.

Directors noted that Spain’s financial sector continues to strengthen, with improved liquidity, efficiency, and profitability. They welcomed the recent insolvency reforms, including the approval of a “fresh start” for entrepreneurs and consumers. With effective implementation and clarity on some key elements, these reforms can facilitate private sector deleveraging while ensuring that a strong payment culture is protected. Directors supported ongoing efforts to encourage banks to boost their high-quality capital and reduce nonperforming loans, thereby facilitating credit growth.

Directors emphasized the importance of placing the public debt-to-GDP ratio firmly on a downward path by pursuing gradual growth-friendly fiscal consolidation and saving any windfall from higher nominal growth and lower borrowing costs. They called for ambitious and well-specified budget measures, while protecting the most vulnerable. Improvements to the regional fiscal framework and close coordination across all levels of the government are also critical to these consolidation efforts.

Main Economic Indicators
(Percent change unless otherwise indicated)
  Projections
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Demand and supply in constant prices

Gross domestic product

 -0.6 -2.1 -1.2 1.4 3.1 2.5 2.2 2.0 1.9 1.8

Private consumption

 -2.0 -2.9 -2.3 2.4 4.4 2.6 2.5 2.3 1.8 1.6

Public consumption

 -0.3 -3.7 -2.9 0.1 0.3 -0.7 -0.3 -0.3 0.0 0.0

Gross fixed investment

 -6.3 -8.1 -3.8 3.4 5.2 3.2 2.7 2.5 2.4 2.2

Total domestic demand

 -2.7 -4.2 -2.7 2.3 3.5 2.1 2.0 1.9 1.6 1.4

Net exports (contribution to growth)

 2.1 2.2 1.4 -0.8 -0.4 0.5 0.3 0.2 0.4 0.4

Exports of goods and services

 7.4 1.2 4.3 4.2 6.5 5.8 5.6 5.4 4.9 4.4

Imports of goods and services

 -0.8 -6.3 -0.5 7.6 8.3 4.7 5.3 5.1 4.2 3.8

Savings-Investment Balance (percent of GDP)

Gross domestic investment

 21.4 19.7 18.5 18.9 19.1 19.3 19.4 19.4 19.4 19.4

Private

 17.7 17.4 16.4 16.9 17.2 17.3 17.4 17.5 17.5 17.5

Public

 3.7 2.4 2.1 2.0 1.9 1.9 1.9 1.9 1.9 1.9

National savings

 18.3 19.5 20.0 19.7 20.0 20.2 20.5 20.6 20.7 20.9

Private

 24.0 27.4 24.6 23.5 22.5 21.3 21.0 20.6 20.3 20.5

Public

 -5.7 -7.9 -4.7 -3.8 -2.5 -1.1 -0.5 -0.1 0.4 0.5

Foreign savings

 3.2 0.3 -1.4 -0.8 -0.9 -1.0 -1.1 -1.2 -1.3 -1.5

Household saving rate (percent of gross disposable income)

 11.9 9.5 10.4 9.7 9.5 9.8 10.1 10.2 10.2 10.3

Private sector debt (percent of GDP)

 276 263 249 236 229 225 220 216 212 207

Corporate debt

 189 177 168 159 156 154 151 149 147 143

Household debt

 87 85 81 77 73 71 69 67 65 64

Credit to private sector 1/

 -3.2 -9.9 -10.2 -6.5 0.4 0.7 0.8 1.0 1.1 1.2

Potential output growth

 0.0 -0.2 -0.3 0.6 1.1 1.1 1.2 1.3 1.3 1.3

Output gap (percent of potential)

 -3.1 -4.9 -5.8 -5.0 -3.2 -1.8 -0.9 -0.2 0.4 0.8

Prices

GDP deflator

 0.1 0.2 0.7 -0.5 0.8 0.6 0.9 1.1 1.3 1.6

HICP (average)

 3.1 2.4 1.5 -0.2 -0.2 1.0 1.0 1.3 1.4 1.5

HICP (end of period)

 2.4 3.0 0.3 -1.0 1.0 1.0 1.0 1.2 1.5 1.5

Employment and wages

Unemployment rate (percent)

 21.4 24.8 26.1 24.5 22.0 20.1 18.8 17.6 16.6 15.8

Labor productivity 2/

 2.0 2.4 2.1 0.2 0.2 0.5 0.6 0.6 0.6 0.6

Labor costs, private sector

 2.8 1.0 0.3 0.3 0.4 0.6 0.9 1.0 1.0 1.1

Employment growth

 -1.6 -4.3 -2.8 1.2 2.8 2.0 1.6 1.4 1.3 1.2

Labor force growth

 0.3 0.0 -1.1 -1.0 -0.5 -0.4 -0.1 -0.1 0.1 0.2

Balance of payments (percent of GDP)

Trade balance (goods and services)

 -0.2 1.6 3.4 2.6 2.7 2.8 3.0 3.1 3.4 3.8

Current account balance

 -3.2 -0.3 1.4 0.8 0.9 1.0 1.1 1.2 1.3 1.5

Net international investment position

 -89 -90 -94 -93 -90 -86 -82 -78 -74 -70

Public finance (percent of GDP)

General government balance 3/

 -8.9 -6.6 -6.3 -5.7 -4.4 -3.0 -2.5 -2.0 -1.5 -1.5

Primary balance

 -7.5 -7.9 -4.0 -2.9 -1.8 -0.6 -0.1 0.2 0.7 0.7

Structural balance

 -7.3 -4.0 -3.2 -2.6 -2.4 -1.9 -1.9 -1.9 -1.8 -1.9

General government debt

 69 84 92 98 98 99 98 97 96 94

Sources: IMF, World Economic Outlook; data provided by the authorities; and IMF staff estimates

        

1/ Excludes loans transferred to SAREB.

2/ Output per worker.

3/ The headline deficit for Spain excludes financial sector support measures equal to 0.5 percent of GDP for 2011 and 2013, 3? percent of GDP for 2012,and 0.1 percent of GDP for 2014.