IMF NEWS

The country’s GDP finally surpassed its pre-crisis level in the first half of 2017. With growth of 3.3 percent in 2016, Spain grew nearly twice as fast as the euro area average. The recovery is broad-based, drawing on consumption, investment, and exports.

From a large deficit of 9.6 percent of GDP on the current account (which comprises the trade balance of goods and services and income flows between residents and nonresidents) in 2007, Spain has enjoyed four consecutive years of surplus, reaching nearly 2 percent of GDP in 2016. This reversal was made possible by strong exports, including in the services sector, a lower energy trade deficit due to low oil prices, and lower interest payments.

The general budget deficit reached 4.5 percent of GDP in 2016, and is on track to slide under the 3-percent threshold set by the European Union by 2018. Once that threshold is reached, the country can exit the excessive deficit procedure of the European Union it has been under since 2009.

However, the government debt ratio is still high at nearly 100 percent of GDP: this is almost three times higher than on the eve of the financial crisis. That is why the IMF recommends reforms primarily to the tax system to increase revenues, which, in turn, could serve as a cushion in harder times.

While the unemployment rate has dropped by 10 percentage points from its peak in 2013 to the current 17.2 percent, it is still the second highest in the European Union; 3.9 million Spaniards are still without jobs. The situation is especially dire for low-skilled youths and for those out of work for longer than a year. To help more workers find jobs, policies including job search assistance and labor market programs such as training should be strengthened, better targeted, and coordinated.

Thanks to wage moderation and labor market reforms, nearly one quarter of all euro area jobs created over the past year are in Spain, primarily in the service sector where 79 percent of Spaniards now work. Yet, just over half of the new jobs are temporary ones, which tend to be less productive and leave workers in uncertainty. Reducing costs associated with open-ended job contracts would help.

The ratio of nonperforming loans—credit that the borrower cannot repay—in the Spanish banking sector is decreasing but remains high: 8.4 percent for bank operations in Spain and 5.5 percent if the extensive foreign business of Spanish banks is taken into consideration. The IMF recommends that banks accelerate their balance sheet clean-up to become more resilient to shocks and to facilitate the provision of new credit to the economy.