IMF lowers Spain growth forecast, warns of 'fragile' rebound

30th July 2010, Comments 0 comments

The IMF on Friday lowered its 2011 growth forecast for the Spanish economy to 0.6 percent from the 0.9 percent it foresaw in April and warned the recovery "is likely to be weak and fragile."

"The particular challenges facing Spain will likely make the recovery slower and more fragile than in the euro area," the IMF said in its latest report on the country's economy.

The International Monetary Fund's growth forecast for Europe's fifth-largest economy for next year was lower than the 1.3 percent expansion predicted by the Spanish government, which is under pressure to close its public deficit.

The IMF listed a deflating property bubble, a "dysfunctional" labor market, heavy private sector indebtedness, weak competitiveness, "anemic" productivity growth and a "banking sector with pockets of weakness" as the challenges faced by the Spanish economy.

"Not only does each factor pose a challenge by itself, but, together, they may create a vicious cycle of negative feedback," the IMF said in the report.

"The central scenario is one of a long and gradual adjustment of the various imbalances in the economy."

Spain scraped out of recession during the first quarter when it expanded by 0.1 percent from the previous quarter and the government expects it will expand by 0.3 percent this year.

The IMF predicts the Spanish economy will contract by 0.4 percent this year. It forecasts growth of 1.7 percent in 2012 and of 1.9 percent in both 2013 and 2014 and of 1.8 percent in 2015.

Spain was the last major world economy to emerge from recession and concern over its weak growth prospects has fueled market worries that it may struggle to rein in a public deficit that shot up to 11.2 percent of GDP last year, the third highest level in the eurozone after Greece and Ireland.

The country entered its worst recession in decades during the second half of 2008 as the global financial meltdown compounded a crisis in the Spanish property market, which had been a major driver for growth in previous years.

"What needs to happen now is that the economy as a whole has to move away from its past reliance on the housing sector and produce more tradable goods," said IMF mission chief for Spain, James Daniel.

"Together with concerted and continued progress on structural reforms, especially in the labor market, we see no reason why Spain should not be able to return to good levels of growth in the medium term."

The government has introduced the steepest spending cuts since Spain returned to democracy following the death of conservative dictator General Francisco Franco in 1975 in an effort to slash the public deficit.

The cutbacks include a freeze on pensions and a five-percent pay cut for civil servants.

The government has also adopted an overhaul of the labour market that will make it easier and cheaper for employers to dismiss workers in an effort to fight an unemployment rate that has hit 20 percent.

Socialist Prime Minister Jose Luis Rodriguez Zapatero has also announced plans to raise the country's retirement age to 67 from 65.

Daniel said if the austerity measures are complemented by a reform of the pension system, "this will put Spain's public finances on a sustainable path."

© 2010 AFP

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