The Spanish economy and the IMF

The IMF's recent report on the world economy shows the high degree of uncertainty surrounding its forecasts due to the confluence of several events: the impact of the war in Ukraine (of highly uncertain duration and consequences), the difficulties in controlling the pandemic in China and the reestablishment of global production chains.

Thomas Osborne
Thomas Osborne
20 May 2022 Friday 17:45
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The Spanish economy and the IMF

The IMF's recent report on the world economy shows the high degree of uncertainty surrounding its forecasts due to the confluence of several events: the impact of the war in Ukraine (of highly uncertain duration and consequences), the difficulties in controlling the pandemic in China and the reestablishment of global production chains. The sum is a downward revision of 0.8 points of world GDP growth in 2022 and 0.2 points in 2023, to stand at 3.6% in both years.

The bottlenecks in the supply of raw materials after the war, which is superimposed on the mismatches between the negative shocks in supply and the thriving demand that still persist after the pandemic, are elements of great concern due to the intense impact they are having on inflation. For the IMF, the increase in the CPI in 2022 will be 5.7% in advanced economies and 8.7% in emerging and developing economies. These are rates well above the desired target of 2% by the central banks, which anticipates a more damaging rise in interest rates the more indebted an economy is.

In this complicated environment, the good news is that Spain is going to be, according to the IMF, one of the developed economies that is going to grow the most this year (4.8%), something that should be relativized since the Spanish economy was one of the ones that fell the most in 2020 (-10.8%) and grew less than the developed economies in 2021 (5.1% compared to 5.2%). It is more difficult for me to believe the inflation forecast for Spain in 2023, since the IMF places it at 1.3%, one tenth less than the eurozone, something difficult to achieve coming from 5.3% in 2022 and taking into account that there will be second-round effects.

One of the most worrying elements of the IMF estimates for Spain is public finances. Specifically, it places the structural public deficit at 4.1% of GDP in 2022 and maintains it at 3.9% in 2027. Bad news for the sustainability of public debt, which is only expected to fall 1 .8 points of GDP in five years (from 116.4% of GDP in 2022 to 114.6% in 2027), so the IMF does not anticipate that Spain will make any effort to control the deficit soon.

We are talking about a structural income-expenditure deviation of around 50,000 million euros each year, which should force the Government to propose a roadmap as demanded, among others, by Airef and the Bank of Spain. And even more so given the rate hike scenario we are facing.

It doesn't surprise me that the IMF doesn't trust us to control the structural deficit if the government plans to raise pensions with the CPI. Do the math: one point of inflation is 1,713 million extra spending on pensions, so if the IMF is correct in its forecast, it is 9,079 million more public spending. And if the Bank of Spain is correct (which places inflation at 7.5%), the figure exceeds 12,000 million euros.


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