The International Monetary Fund (IMF) called the markets as "schizophrenic" yesterday, and perhaps they are right. IMF Chief Economist Olivier Blanchard said that the world economy has been behaving like a roller coaster during the past six weeks and that Spain is posturing as Europe's disciplined pupil. And perhaps too much.
During a presentation of its World Economic Outlook (WEO) and its Fiscal Monitor, experts from the Fund gave their view that Spain would contract slightly this year as its GDP shrinks by 1.8% year-to-year and will experience a sharp 2.5% contraction during the last quarter of 2012.
That said, in 2013 the Spanish economy should begin its slow climb to an anemic growth rate of 0.1%, which is four-tenths of a point higher than what was predicted in January. Meanwhile, Spain's unemployment rate will ascend to 24.2%. At this level it is the highest in the world according to information available in the WEO, and it is expected to fall a mere three tenths of a point in 2013, settling around 23.9%.
Under these circumstances, many people are asking if fiscal adjustments employed by the Spanish government and Mariano Rajoy have gone far enough. According to data in the IMF's Fiscal Monitor, this year Spain will not meet the deficit goal that the EU imposed. And it won?t meet the goal next year either. This trend looks chronic, because the Spanish deficit will likely stay around 3% of GDP until at least 2018. "We cuts across the board, but the deficit is very big and making them looks like it will be more like a marathon than a sprint," said Jorg Decressin, an assistant manager of the Department of Investigation at the IMF.
From his point of view, "the Spanish government has found a balance between making cuts and fueling growth." That said, the IMF's WEO report clarifies that although Spain is undergoing a "major consolidation" it could have done it differently "to make a better stronger on a weak economy...it would have been preferable to make moderate cuts that align better with the business cycle," the report said.
