The International Monetary Fund has warned Spanish unemployment could be stuck above 25 per cent for another five years as it calls for decisive reforms to generate jobs and growth (release).
Existing reforms have not been enough to address labour market rigidities, the IMF says, and the businesses need greater internal flexibility. Meanwhile, private sector delveraging is weighing on growth, and the insolvency regime must be improved.
Although the gap between government spending and revenues has fallen, it has not fallen enough. However, the government must be careful to reduce spending gradually in order not to shock the economy.
Key external risks to Spain’s recovery identified by the IMF include a new bout of financial market stress, a delayed banking union (both of which would raise borrowing costs) and a slowdown in emerging markets (which would undermine exports). Its baseline prediction is low growth in the medium term as the government works to meet its structural consolidation targets. Private consumption will remain constrained, and the economy will rely on strong net exports – a potentially dangerous situation to be in.
This weak recovery will keep unemployment above a quarter of the population in 2018. This morning, it was reported that Spanish unemployment fell by less than expected in July. Unemployment was 26.3 per cent in the second quarter of the year.