Yesterday the IMF lowered its economic forecasts for Spain for 2012 and 2013 after several meetings with the Ministry of Finance, the Bank of Spain and Spanish entrepreneurs, politicians and labor unions. The IMF's forecast reflects its pessimistic view of the latest cutbacks that the Spanish government applied exactly two weeks ago. The IMF, directed by Christine Lagarde, estimates that Spain's GDP will contract 1.7% in 2012 and 1.2% in 2013. The last forecast for these figures was published on July 16 and predicted contractions of 1.5% and 0.6%. As for the deficit, the IMF estimates that it will settle at 6.3% this year, which is the exact target that the EU set for this fiscal year. In 2013 the deficit will be 4.7%, which would be two percentage points higher than hoped.
Hiding behind these chilling statistics is a clear, strong message: Spain needs to enact even more spending cutbacks if it wants to meet the myriad and stringent requirements outlined in the IMF report. And the government's best opportunities to make big cutbacks are in the regional governments, whose efforts to rein in spending have been rather weak until now for fear of a public backlash.
Spain should enact the extra cutbacks adeptly in order to balance out low revenues caused by sluggish economic activity and the growing need for funds to pay down expensive interest rates on issued debt. If it's not stopped, this perverse cycle could deepen the recession and force the country to make even stricter cutbacks.
