Unemployment in Spain is expected to rise to more than 28 percent this year before stabilizing, while the fiscal deficit is expected to slightly drop in by the end of the year and remain at those levels the following year, according to the latest economic forecasts released on Wednesday by the Organization for Economic Co-operation and Development.
The OECD figures are in contrast to many projections made by the government of Prime Minister Mariano Rajoy, including estimates that unemployment will drop to 26.7 percent in 2014 from the current 27.2 percent.
The agency expects economic output to decline 1.7 percent this year, compared with a government forecast of a contraction of 1.3 percent, before returning to growth of 0.4 percent in 2014. The fiscal deficit, excluding the European bailout to clean up the banking system, is expected to narrow from 7.0 percent last year to 6.9 percent this year.
“Boosting growth should be the government’s number one policy priority,” the report states. “The government should aim to meet its fiscal consolidation targets in structural terms, but to let the automatic stabilizers operate fully.”
It recommends that collective wage agreements should also be abolished to give firms more flexibility to hire “in a situation of uncertainty and changing circumstances.” Nevertheless, the OECD said that positive steps have been made in this direction.
Among the factors that have caused a slowdown in Spain, according to the OECD, are tight credit and overall economic decline throughout Europe.
“Declining wage pressures have improved Spain’s cost competitiveness and export performance has been the third strongest among the 15 OECD members of the euro zone since 2007.”
“Lending conditions have stabilized but at a much more restrictive post-crisis level,” states the report. Nevertheless the pressure to maintain bank profits will “likely limit the passing through of better bank financing conditions to borrowers.”
To activate growth, the OECD recommends that the Rajoy government undertake a series of structural reforms and “continue to develop its medium-term consolidation plan.”
“The economy is expected to continue to contract in 2013 before growth slowly resumes in 2014 as the euro area recovers,” according to the OECD.
“On the upside, the improvement in financial conditions in Europe and Spain, as well as ongoing cost-competitiveness gains, may spur a stronger expansion than projected.
“On the downside, the risk of contagion to Spanish government borrowing costs and private sector conditions from adverse events in Europe remains high.”
The OECD also predicted Portuguese unemployment would hit a new euro-era record of 18.6 percent of the active population this year, with the economy set to contract by 2.7 percent this year, compared with a government estimate of around 2 percent. The jobless rate hit 17.7 percent at the end of last year when output contracted by 3.2 percent.
It also predicted a fiscal deficit for this year of 5.6 percent, down from 6.4 percent in 2012.
“Against the background of ongoing fiscal consolidation and weak external demand, the economy is projected to contract throughout 2013 and the unemployment rate to reach historical highs of more than 18 percent,” the OECD said in its latest Economic Outlook report. “As global conditions improve and domestic demand recovers, growth is expected to resume slowly. Inflation will remain very low over the projection horizon.”
The agency recommended that the government continue to push structural reforms to unleash growth potential. It highlighted the need for measures to address labor market segmentation, and pointed out the scope that exists to enhance competition in gas and electricity.