I am normally critical of IMF forecasts, but their baseline unemployment projection for Spain of 25% or more with no more than .6% annual growth through 2017 seems reasonable. The pessimistic scenario is a toxic deleveraging downward spiral that continues right now.

The optimistic scenario assumes 2% growth, but that scenario does not start until 2018, and only if labor reforms in Spain and Europe take place.

Via Mish-modified Google translate from El Economista, please consider IMF estimates that Spain will grow by an average of 0.6% over the next five years

The team led by James Daniel, Chief of Mission of the International Monetary Fund (IMF) to Spain, estimates unemployment, which will remain above 25% over the next five years.

Ignoring the 1.6% downturn that the IMF expects the country to suffer this year, the average growth for the Spanish economy between 2014 and 2018 will be 0.6%. GDP growth will remain below 1% until 2017 and thereafter only begin to expand beyond these levels.

In 2018, the optimistic scenario in which reforms (both from Spain and Europe) are accelerated and gain ground would result in an acceleration of growth of 2% in 2018 and a significant increase in employment.

The pessimistic scenario starts immediately if deleveraging pressures and financial difficulties intensify. This scenario would create a toxic spiral between macro and financial context and would leave the public and private debt at high levels in the future, the country would not grow until 2017, and unemployment would remain above 27%.

The baseline scenario suggests Spain will probably start to grow later this year, in the third or fourth quarter, but that’s not important. “The really important question is whether Spain will grow enough to create a lot of jobs to reduce the unacceptably high unemployment and increasing family income”.

Unfortunately, growth will not be strong and have to generate a lot more work. Reducing unemployment requires action in many areas, including from Europe, “specifically on labor issues.” The head of the IMF Mission explained that to ensure job creation Spain needs a further increase in wage flexibility, improvement in training for the unemployed, reduced taxes and elimination of regulations that discourage hiring.

The Fund criticizes the adjustment burden continues to fall on employment (temporary and youth especially) instead of wages. It therefore recommends a social pact in which employers commit to hiring increases in exchange for wage cuts of up to 10% over the next two years.

According to the IMF, these measures should be accompanied by a reduction in employers’ contributions to social security and VAT increased two years of pay cuts.

IMF Proposes Spain Reduce Wages by 10% in Two Years

Via Google translate, La Vanguardia reports IMF Proposes Spain Reduce Wages by 10% in Two Years

The IMF said today that it would be beneficial to Spain a social pact in which employers commit to hiring increases in exchange for wage cuts in agency models would be 10% in two years.

These measures should be accompanied by a reduction in employers’ contributions to social security and VAT increased two years after wage cuts, according to the annual report on the Spanish economy published today by the International Monetary Fund (IMF).

IMF urges Spain to “greatly reduce the number of contracts”, reviving the idea advocated by some analysts and agencies to establish “a permanent contract with lower firing costs initially and gradually increase with seniority.”

IMF Silliness

Hiking the VAT is ridiculous, hiring commitments are ridiculous, and although lowering wages is likely a good idea, the free market should set rates, not government bureaucrats who have no idea what wages should be.

The best way for Spain to reduce its deficit is not by hiking the VAT, but by getting rid of government bureaucrats and lowering pension benefits for government workers. 

IMF Projections

Projections 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Gross domestic product -3.7 -0.3 0.4 -1.4 -1.6 0.0 0.3 0.6 0.9 1.2
Unemployment rate (percent) 18.0 20.1 21.7 25.0 27.2 27.0 26.9 26.6 26.0 25.3
Deficit as Percent of GDP -11.2 -9.7 -9.0 -7.0 -6.7 -5.9 -5.1 -4.2 -3.3 -2.3

The above table condensed from IMF Executive Board Concludes 2013 Article IV Consultation with Spain

Note that the IMF does not think Spain will reduce its deficit below 3% until 2018. Prime Minister Rajoy thinks the deficit will be 2.7% by 2016. Recall that in April of 2012, Rajoy projected 3% by 2013. 2016 is fantasy-land material as well. Even the IMF projection is highly optimistic (at best).

Spain may return to growth for a brief while later this year, but don’t expect many jobs out of it. Spain needs labor reform, work rule reform, pension reform and lower taxes. So does France, Greece, Italy, and the rest of Europe.

Unfortunately, Brussels is likely to demand higher taxes, and the unions are likely to resist the needed reforms. A further downward spiral is not out of the question, but neither is stagnation and zero growth  (lower than the baseline scenario of the IMF).

The optimistic scenario is five years away at the earliest, and unlikely at that, unless unions suddenly give in to badly needed reforms and/or some strong political leader can force free-market policies over substantial opposition.

In the meantime, who knows what crazy rules the Nannycrats in Brussels are likely to come up with?

Mike “Mish” Shedlock