IMF predicts bigger decline for Spain’s economy

11th December 2008, Comments 0 comments

Unless comprehensive structural reforms are carried out, Spain’s economy will contact by 1.0 percent and be stagnant for a longer period of time, says the IMF.

MADRID – Spain's economy will shrink by at least 1.0 percent next year instead of the 0.2 percent forecast in October, and risks entering an extended period of stagnation unless sweeping structural reforms are carried out, the IMF said Wednesday.

"The near term prospects are sombre and uncertain," the International Monetary Fund said in a report posted on its web site, adding "the medium-term recovery also crucially depends on progress with implementing comprehensive structural reforms."

"In their absence, Spain could get stuck in a low-competitiveness, slow-growth, extended-deleveraging, and high-unemployment equilibrium, from which returning to lower public debt would be difficult," it said.

Dismissal costs must be lower to boost hiring, collective bargaining agreements need to be more flexible and the practice of indexing wages to inflation must end, the Washington-based Fund said.

Spain's public deficit will exceed 5.0 percent of gross domestic product (GDP) next year as a result of the economic stimulus measures adopted by the socialist government of Prime Minister Jose Luis Rodriguez Zapatero, it said.

At the end of November, Zapatero announced his government would spend an EUR extra 11 billion over two years, mainly on public works to boost the country's flagging economy and cut unemployment.

Spain's once-buoyant economy is on the verge of recession as the global financial crisis has hit the key construction sector, which was already weakened by oversupply and rising interest rates.

The Spanish economy contracted for the first time since 1993 in the third quarter, shrinking 0.2 percent, and most economists expected it will shrink again during the fourth quarter.

The Paris-based Organisation for Economic Co-operation and Development (OECD) predicted at end November that the Spanish economy would contract 0.9 percent next year.

The European Commission, the executive arm of the European Union, predicts Spanish GDP will fall by 0.2 percent next year, weighed down by lower private consumption and an ongoing contraction of housing and equipment investment.

The Spanish economy expanded by 3.7 percent last year.

[AFP / Expatica]

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