Spain: IMF Staff Concluding Statement of the 2017 Article IV Mission
July 18, 2017
Spain’s economic recovery remains strong, with consumption, investment, and net exports all contributing to a more balanced growth pattern. A shift in resources toward Spain’s competitive export sector, with the services sector creating most new jobs, has played an important part in the rebound. Banking sector balance sheets are stronger, private sector debt is coming down, and credit availability is improving. As the recovery is maturing, it is time to tackle the remaining vulnerabilities related to elevated public debt and complete the still-ongoing post-crisis banking sector adjustment. At the same time, reducing structural unemployment and fostering productivity growth remain priorities. Without farther determined progress on structural reforms and rebuilding of fiscal buffers, the economy would remain vulnerable to shocks and risk leaving some segments of the population behind.
Spain is in the fourth year of impressive economic expansion and job creation. GDP likely surpassed its pre-crisis level in the second quarter, with growth remaining well above the euro area average. Thanks to past reforms, the economy has become more competitive, flexible and resilient. A dynamic services sector, much of which is export-oriented, has replaced an outsized construction sector, and together with a recovery in manufacturing contributed to the sustained improvements in the current account balance. Moreover, the private debt burden is more manageable, and the banking sector is stronger. Real GDP is projected to grow by 3.1 percent this year, and there is upside risk as the momentum created by past reforms may be bigger than estimated.
But challenges remain. They need to be fully addressed to offset the expected slow-down in medium-term growth and to build greater resilience. Public debt and structural unemployment are still high, population aging is creating fiscal pressures, and productivity lags that of EU peers. In addition, Spain’s net debtor position with the rest of the world remains large, and financial sector adjustment and further reforms to strengthen and modernize the institutional arrangements are yet to be fully completed.
Fiscal Policy: Rebuilding Buffers
The supportive economic environment makes the present a good time to lower fiscal vulnerabilities further. Spain’s high public debt ratio, close to 100 percent of GDP, leaves little room for fiscal policy to respond to shocks. In addition, Spain’s population dynamics imply a significant increase in age-related spending over the medium term. Maintaining the gradual adjustment pace established for 2017, until the structural budget is in balance, would rebuild fiscal buffers faster, by accelerating debt reduction.