The IMF raises Spanish GDP growth to 2.5% in 2023 and points out that making cuts and raising taxes can lower inflation

The International Monetary Fund (IMF) has revised upwards its growth forecast for the Spanish economy in 2023. The IMF economists believe that Spanish GDP will grow by 2.5% this year and 2% in 2024, two figures that clearly exceed the euro area average (0.9% and 1.5%) and the large European economies.. This is reflected by the institution in its world economic outlook report published this Tuesday. In addition, in the document the agency points out that governments can help central banks in their fight against inflation by cutting public spending or raising taxes.

So far, the IMF forecast is the most optimistic with Spain among the big institutional analysts. The 2.5% predicted by the Washington-based organization exceeds the forecasts of the Bank of Spain (2.3%), Airef (2.3%), OECD (2.1%) and the European Commission (1.9%). In fact, it is even higher than the one that the Government itself prepared to design the General State Budget for this year.

The agency has raised its growth forecast for this year by one percentage point compared to its previous forecast published in April. In this way, the IMF joins the consensus of analysts, who have been improving their forecasts for Spain in recent months as the macroeconomic data published have brought positive surprises.. The resistance of the labor market, the strong recovery in tourism and a statistical revision by the INE of the growth data for the past semester have boosted expectations for 2023.

From the Ministry of Economic Affairs they point out that Spain's is “one of the biggest upward revisions” in the IMF forecast published this Tuesday. They also point out that Spain will have the highest growth of the main developed economies in 2023 and 2024, with an increase in GDP that will be almost triple that estimated for the euro zone (0.9%), thanks to the good performance of services and tourism.

However, there are already several analysts —among them, the Bank of Spain— who are warning that the economy is beginning to show signs of weakness. In June, employment data reflected a significant slowdown in job creation. High interest rates continue to wear down households, the recovery in the tourism sector is beginning to peter out, and high-frequency indicators such as the PMIs reflect an incipient slowdown in growth.

Globally, the IMF believes that the economy will slow down in 2023 and grow at a rate of 3%, five tenths less than last year. A moderate figure taking into account historical precedents. In the euro area the slowdown is especially significant. According to the IMF, the euro countries will go from growth of 3.5% in 2022 to one of 0.9% in 2023, which will then rebound to 1.5% in 2024. The bite of high interest rates around the world chokes households, while the possibility of further financial turmoil like the ones seen after the failure of Silicon Valley Bank and Credit Suisse last spring lingers.

Tax cuts and increases to help the ECB

Central banks are still struggling to control inflation, which is still at historically high levels, but prices are resisting more than expected. The IMF now believes that core inflation will decline more slowly than expected, especially in advanced economies, and has revised up its global inflation forecast for next year.

In this context, the institution headed by the Bulgarian economist Kristalina Georgieva sets “defeating inflation” as its number one political priority.. For this reason, the IMF recommends that central banks be relentless in their fight against inflation and that they not be tempted to take a break with rates prematurely.. “A restrictive position [in monetary policy] is necessary until there are clear signs that underlying inflation is cooling,” they point out.. In other words, rates should remain high for as long as it takes to see a clear cooling in prices.

In addition, the IMF urges governments to do their part in the fight against inflation and leaves a recipe. “Cuts in public spending or tax increases aimed at ensuring debt sustainability can further reduce inflation and shore up the overall credibility of disinflation strategies,” they argue.

Along these lines, the agency believes that the countries with the highest deficits and debt should draw up adjustment plans to reduce these magnitudes to their pre-pandemic levels.. For this reason, the IMF urges countries to undertake budgetary adjustments that allow them to build “fiscal reserves”, but without losing sight of the most vulnerable.