IMF Outlook for Spain: Growth Revisions, Risks, and Fiscal Path

The International Monetary Fund (IMF) released its latest outlook for the Spanish economy, lifting the 2024 growth projection to 2.4 percent from its previous April estimate. This marked improvement places Spain ahead of the government’s own projection of 2 percent, a view echoed by the economy minister, who noted the upward revision as a positive signal for the domestic economy.

The government, for now, maintains a cautious macroeconomic scenario, projecting 2 percent growth for 2024 and 1.9 percent for 2025 as the framework for drafting next year’s budget. The minister also acknowledged that the July report on the economic situation could warrant an adjustment to the government’s forecast if new data justify it.

The IMF’s Spain-focused article IV assessment keeps the 2025 growth outlook at 2.1 percent and pegs 2026 at 1.8 percent. The Fund expects domestic demand to sustain momentum and sees private consumption strengthening as saving rates normalize and real wages continue to rise. Inflation, both overall and core, is projected to ease further through 2024 and 2025, approaching the European Central Bank’s 2 percent target before mid-2025. Specifically, inflation is expected to average 3.4 percent in 2023, slide to 2.9 percent in 2024, then ease to 2.3 percent in 2025 and 1.9 percent in 2026.

Strengths and Weaknesses

The IMF stresses the economy’s notable resilience in the face of global uncertainty and tighter financial conditions. The labor market has held up well, supported by significant migration flows and rising labor force participation. On the downside, investment remains below late-2019 levels, productivity growth remains sluggish, and unemployment in Spain remains higher than the euro area average. For 2024 and 2025, the IMF anticipates improved access to credit and new disbursements of European Next Generation EU grants to boost investment.

As anticipated in April, the IMF also warns about internal political fragmentation as a key risk to Spain’s outlook, along with the potential for weak execution of European funds, a slowing global economy, and geopolitical tensions.

Fiscal Consolidation

Again, the IMF highlights the need for fiscal adjustment in coming years to meet Europe’s new fiscal rules. In April, it estimated a three-percentage-point GDP adjustment needed between 2024 and 2028, equivalent to roughly 0.6 percentage points of GDP per year. In euro terms, this translates to just over €9.2 billion for 2024, rising to about €46 billion over the five-year span.

From the IMF’s view, the consolidation should be steered through an explicit fiscal plan, focusing on reforming taxes and pension systems to ensure long-term sustainability and to rebuild fiscal buffers. The report also emphasizes that if extraordinary taxes on banks and energy firms become permanent, they should be designed to minimize distortions in the economy.

List of Priorities

The IMF urges a program aimed at reducing tax inefficiencies and broadening the tax base to support a sustainable debt path. It also calls for measures to protect pension sustainability, while ensuring that any exceptional levies on the financial and energy sectors are carefully structured to avoid adverse effects if kept in place long-term. The continuation of the IMF’s recommendations from April includes extending pension calculations across the entire working life, lowering dismissal costs, tempering the rise of the national minimum wage, and reconsidering some VAT exemptions, among other steps. It also cautions against policies that could undermine productivity, such as shorter working hours or restrictive housing rent caps that have already faced scrutiny in certain regions.