ARCHIVED - IMF says Spain will not return to pre-pandemic levels of activity until 2023

Spain will suffer the worst effects amongst the advanced economies

The International Monetary Fund (IMF) has published its conclusions following the review of Spain's economy under Article IV that governs member states. The team led by Andrea Schaechter, head of the mission for Spain, projects an annual loss of real GDP production of 12.8% in 2020, unchanged when compared with what was already estimated at the end of June.

"Spain has suffered the deepest blow in advanced economies," Schaechter acknowledged at her press conference. "It will take years to recover and we do not see Spain recovering its pre-covid levels until at least 2023," she added. In this regard, the head of the mission indicated that the country will not see sustainable growth in which unemployment will also be constantly reduced, until 2022.

However, for next year real GDP could grow by 7.2%, an improvement of almost one percentage point compared to what was announced three months ago, underpinned by the use of the European Union Recovery and Resilience Mechanism and its trust building effects. Of course, once again, Schaechter clarified that the potential impact of these funds "will depend on how quickly they are distributed" as well as the effectiveness and conciseness with which they are used.

The document presented by the mission for Spain highlights how the impact of the covid-19 pandemic has been particularly serious for the country. In the first six months of the year, the Spanish economy suffered the steepest drop in GDP amongst the large advanced economies, so keeping the second wave of infections under control will be critical for the economic outlook.

At this time, the IMF considers that production will take several years to reach its pre-pandemic level and uncertainty about the short and medium term projections is very high. Not only because of the coronavirus but also because of the possibility of a no-deal Brexit and an escalation of trade tensions.

Under the current scenario, the officials of the institution led by Kristalina Georgieva, demand that the Government use fiscal and economic measures to try to prevent the ongoing recession from turning into stress for the financial sector, with even higher real and social costs. This includes, for example, extensions of the temporary employment regulation (ERTE) regime, particularly for the most affected sectors.

Over time, unemployment benefits should gradually become the predominant safety net. According to the IMF, this will facilitate the reallocation of jobs and workers, given the decrease over time of the net benefits derived from maintaining the link between workers and their jobs through temporary employment regulation files, and would also mitigate the risk of keeping workers in unviable companies and sectors.

Public debt above 120%
The IMF mission for Spain emphasizes that the advance announcement of a gradual adjustment plan, contingent on the economic situation, is necessary to send a clear signal to the markets and promote transparency in economic policy measures. It projects that the pandemic will raise the public debt ratio by almost 30 percentage points to over 120% of GDP in the coming years.

Faced with this situation, the Fund's experts believe it is appropriate that once the economy finds a sustainable recovery and unemployment begins to decline steadily, something that could happen as early as 2022, a gradual fiscal adjustment is implemented to channel public debt. by "a steady downward path."

The plan should include sustainable structural measures, especially on the revenue side, that would help rebuild fiscal buffers while supporting more inclusion and innovation. There is also a need for a sustainable package of pension reforms that balances pension sustainability with social acceptability.