IMF cuts economic growth forecast to 1.5% in 2024, but confirms Spain will lead advanced economies

The International Monetary Fund (IMF) has confirmed that Spain will lead the growth of advanced economies over the next 2 years. The international organization predicts that our country’s GDP (Gross Domestic Product) will grow by 1.5% in 2024 (2 tenths below the previous estimate and half a point less than the government did in the fall) and will accelerate to 2.1%. % in 2025, compared to 0.9% and 1.7% respectively, which will be observed in the eurozone as a whole.

The update to IMF forecasts reflects a slowdown in activity at the global level once the recovery from the pandemic shock ends in 2022 to 2023. Likewise, these forecasts confirm Spain’s exceptional character in a new economic context marked by inflationary pressures due to interest rate hikes by central banks and due to geopolitical uncertainty. Our country also led economic growth last year, growing by 2.5%, INE reported on Tuesday, exceeding all expectations.

In fact, Economy Minister Carlos Bodi highlighted the positive surprise in fourth-quarter GDP growth to justify the government’s 2% forecast. The truth is that the latest quarterly data is not included in the IMF’s forecasts. The 0.6% increase from the previous quarter is the largest since the recovery in the second quarter of 2022, as can be seen in the following chart.

Among the major eurozone partners, Germany’s economy will grow by 0.5% in 2024 and 1.6% in 2025, after contracting by 0.3% in 2023 and undoubtedly after entering a technical recession (two consecutive quarters of contraction in activity ) in the first half of this year. year. According to the same forecasts, the French economy will grow by 1% and 1.7% over the next two years. In Italy – 0.7% and 1.1%, respectively.

It is the weakness of the foreign sector that is being touted as the biggest obstacle for the Spanish economy, as forecasts indicate that household consumption will be resistant due to the strength of the labor market, due to falling inflation, due to falling interest rates. ECB, income protection measures (such as increases in SMI and pensions), the phasing out of other measures against price increases (such as reductions in VAT on basic food products, energy bills or public transport discounts) and wage increases in general (although they are not enough to restore the purchasing power lost in recent years).

The big challenges for households in Spain will continue to be housing unaffordability, especially in major capital cities, and inequality.

In turn, the reduction in company costs (mainly for energy and raw materials) and the implementation of the Recovery Plan will stimulate company investment, which is the most delayed component of activity since 2019. Meanwhile, the slowdown in exports will be partially offset by tourism and falling prices for oil, gas and other resources that our economy needs to purchase abroad.

The main consequence of the wars that Ukraine and Gaza have experienced is their impact on energy prices and global trade. In particular, a possible escalation of tensions in the Red Sea. Even the possible closure of the Strait of Hormuz in the Middle East, an important enclave for all types of goods. “Further increases in commodity prices due to geopolitical turmoil – such as ongoing attacks in the Red Sea – and supply disruptions could prolong restrictive monetary conditions,” the IMF warns in a report accompanying its forecasts.

At the moment, the direct impact for our country is limited. “The Red Sea crisis is increasing global transport costs. However, our bottleneck indicator suggests that its economic impact for now will be reduced compared to other previous episodes,” the Bank of Spain emphasized this Monday.

On the other hand, “deepening problems in China’s real estate sector or disruption caused elsewhere by tax hikes and spending cuts could also cause disappointment in economic growth,” the IMF adds.

Without a doubt, the return of fiscal rules to the European Union (EU) is a condition for economic development. Especially the countries with the most debt and the largest fiscal imbalances, such as Italy and Spain. The Coalition Government is confident that our Government will achieve the target of reducing the deficit (the difference between government expenditure and revenue) to 3%, as well as the debt to GDP ratio, as required by the recently launched fiscal corset. .

Economic transformation

In the pandemic recovery, the evolution of our country’s economy has been highlighted by an unprecedented social response (ERTE funding, IMV project, pension revaluation…) as well as other measures that have contributed to structural changes in the economy. the labor market (where a record 21 million people are employed), a greater weight in innovation and technology-related sectors, and growth in services exports (not just tourism).

Public spending efforts (thanks to the repeal of previous EU budget rules in 2020) have allowed the government to take these decisions and ensure that household incomes can withstand the damage of inflation or that corporate profits exceed pre-COVID levels.

In the opposite sense, it caused indebtedness (government debt relative to GDP, already inflated by the 2008 financial crisis) to fall only from its 2020 high; when it exceeded 120%, due to economic growth, given the high budget deficit at this stage of recovery (in 2022 it was still 4.7% of GDP, in 2023 it will approach 4.2%).

Now the deficit needs to be reduced. Yes, with more flexible terms than ten years ago. This path is already marked by the latest anti-crisis decree, approved by the Council of Ministers at the end of 2023 and reducing its cost to 5.3 billion from 15 billion in 2023 and 22 thousand in 2022.

“Fiscal policy that is looser than necessary and projected could lead to a temporary increase in growth at the risk of a more costly subsequent adjustment,” the IMF insists in its report.