Spain’s economy may contract 1.2 percent next year, the Washington-based IMF said in a report today, compared with an estimate for a 0.6 percent slump published earlier this month. The economy will shrink 1.7 percent this year, more than the prior forecast of 1.5 percent, pushing unemployment to 24.9 percent.
“The new fiscal package, regional government actions and structural measures are broadly in line with staff recommendations,” the IMF said in the report. The deficit squeeze will have a “significant impact on growth, especially in 2013.”
Rajoy announced 65 billion euros ($80 billion) of budget cuts on July 11, ditching election pledges as he raised value- added tax, reduced unemployment benefits and scrapped tax rebates. He is trying to stem a surge in borrowing costs to euro-era records and comply with conditions linked to a 100 billion-euro European bailout for the nation’s banks.
The IMF also praised the terms of the bank rescue, saying they were “in line” with the fund’s recommendations. Still, while the loan for banks and agreements to strengthen the euro region made by leaders last month “mitigate short-term risks,” they may not be enough, it said.
“Market tensions could intensify further, threatening market access, particularly if policies fail to stem capital outflows or due to further stress elsewhere in the euro area,” it said. “Downside risks dominate.”
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