IMF Executive Board Concludes 2022 Article IV Consultation with Spain

Washington, DC: On January 18, 2023, the Executive
Board of the International Monetary Fund (IMF) concluded the Article IV


with Spain.

Economic activity in Spain has remained resilient despite the new
headwinds posed by the fallout of Russia’s invasion of Ukraine. Strong
rebound in tourism and other services have supported growth this year.
Employment has surpassed its pre-pandemic level. However, elevated
global energy and food prices, the weakening of trading partners’
growth, deteriorating consumer and business confidence, and rising
interest rates have slowed the recovery of output.

Elevated inflation in 2022 was largely caused by surging energy prices
and persistent supply constraints. After reaching double-digit levels
in the summer, headline inflation declined to 5.8 percent in December,
reflecting a drop in European gas prices and the impact of energy
support measures. Core inflation remains above 6 percent due to a
gradual passthrough of higher energy costs to broader prices and,
possibly, diminishing spare capacity in the economy. Wage pressures
have been contained so far.

Growth is projected to moderate from 5.2 percent in 2022 to 1.1 percent
in 2023 reflecting the effects of high energy and food prices, tighter
financial conditions, and weaker external demand. Output is projected
to reach its pre-pandemic level by early 2024. Headline inflation is
expected to continue to moderate gradually in 2023 reflecting a high
base in 2022, the reduction of supply bottlenecks, and some
normalization of global fossil fuel prices. Nevertheless, both headline
and core inflation are likely to remain above the 2-percent target in
the near term.

Uncertainty around the outlook is significant. Downside risks include
tighter-than-expected financial conditions, weaker global demand, and
further energy price volatility. On the upside, accelerated use of NGEU
funds and faster unwinding of household savings could boost domestic

Executive Board Assessment


Executive Directors commended Spain’s economic resilience and strong
labor market performance in the context of successive shocks. Directors
noted, however, that the outlook is subject to significant uncertainty
given vulnerability to spillovers from Russia’s war in Ukraine, weaker
global demand, tighter financial conditions, and elevated energy
prices. Against this background, they underscored the importance of
flexible and carefully calibrated macroeconomic policies as well as
strong implementation of the structural reform agenda to support
sustainable, inclusive growth.

Directors commended the authorities for their timely policy support to
help households and firms deal with surging energy prices. They
welcomed the recent steps toward better targeting and greater
preservation of price signals in the support package approved for 2023.
Directors considered that continued progress to overcome fossil fuel
dependency is necessary in the medium term.

Directors noted the improvement in public finances since the pandemic
and welcomed the moderately contractionary fiscal stance envisaged in
the 2023 budget. They emphasized that a gradual and sustained fiscal
consolidation, underpinned by a medium-term consolidation plan, will be
needed in coming years to create space for responding to future shocks.
Directors also highlighted the importance of adopting additional
measures to preserve the sustainability of the pension system.

Directors observed that the financial sector has weathered the pandemic
and the fallout from the war in Ukraine well so far, and encouraged its
close monitoring to ensure that it remains sound and resilient. They
noted that the deterioration of the macroeconomic outlook and the rise
in interest rates will likely erode borrowers’ repayment capacity, and
called for banks to continue to be forward-looking in their assessment
of loan quality and to maintain adequate levels of provisions.
Directors also stressed the need to closely monitor the impact of the
new temporary banking sector levy on the provision and cost of credit.
They commended the progress in addressing the 2017 FSAP recommendations
and steps taken to strengthen the private debt resolution framework.

Directors welcomed the progress on the Recovery, Transformation and
Resilience Plan and the acceleration of the execution of Next
Generation EU (NGEU) funds, which should reduce barriers to
productivity growth. They stressed that establishing a system of
regular, data-driven, outcome-based evaluation of the reforms will be
crucial. To ensure an effective use of NGEU funds, Directors
underscored the need to improve coordination at all government levels
and with the private sector, and to enhance the collection and
reporting of data on execution.

Directors acknowledged the positive initial results from recent labor
reforms, with a significant share of workers shifting from temporary to
permanent contracts. They noted the importance of continued monitoring
to evaluate reform effectiveness and the need to revamp active labor
market policies to improve labor matching efficiency and address skill