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The International Monetary Fund (IMF) warns in its latest report on Spain of the risks associated with high corporate and household debt, as well as the high concentration of mortgage loans.
Along with this, he insists on the need to control the strong external deficit and expects a “soft landing” of the economy as of this year, although he advances that “some clouds persist due to accumulated imbalances” that could put at risk the moderation expected in the slowdown process.
For the years 2007 and 2008, the body led by Rodrigo Rato expects a deceleration in growth, up to 3.5%, accompanied by an increase in the trade deficit, which will go from assuming 9.5% of GDP this year to about 10% next.
In reference to the financial environment, the IMF states that “the main risks are still associated with the rapid increase in credit and the high concentration of loans in the housing market”.
However, he indicates, “the comparisons made by some analysts between the sub-prime market of the United States and the housing market in Spain are not well founded”, since “a comparable phenomenon is not occurring” in the Spanish economy.
Despite these uncertainties, the agency believes that “the Spanish economy has been doing well and that its short-term prospects remain bright.” “It is important that the achievements reached so far do not lead to complacency, fueled by the expectation of a benign continuation of past trends,” he adds.
The agency refers to a rebalancing of the Spanish economy and notes the slowdown in consumption and the mortgage market due to the rise in interest rates, while strong corporate profitability stimulates investment in capital goods.
Competitiveness and pensions
The strong Spanish trade deficit only exceeded in the EU by the United Kingdom, reflects the loss of competitiveness of the economy and is accompanied by a strong debt not only of households but also of companies.
“The continued loss of competitiveness in Spain and the rigidity of its domestic market do not augur that deficiency are quickly absorbed through a rapid change of resources in the direction of the export sector,” he says.
In addition, he calls for “greater ambition” in pension reform and stresses the importance of maintaining budget stability in the future. The Law of Dependency, he says, requires “careful attention”, since it carries the risk of additional pressures related to costs.
“The recent bonanza in income will probably not last, which shows the importance of spending restrictions applied during ‘good times’,” the report said, which also calls for an “exemplary” application of the Budget Stability Law.
On the reforms, he asks that “the political calendar does not act as an obstacle” when addressing some legislative changes, including some of a structural nature or related to the pension system.
Despite the criticism, the IMF describes as “remarkable” the economic performance of Spain during the last year and values the rate of job creation, the recovery of productivity, the gradual moderation of inflation and the increase in the surplus to 1.8% of GDP.