The 2021 labor reform will not be enough to quickly reduce Spain’s high level of unemployment to European standards, according to the latest projections from the International Monetary Fund (IMF). The IMF predicts that the unemployment rate will not drop below 11% until at least 2030, which is a blow to the government’s goal of reaching 10% by 2026. The President of the Government, Pedro Sánchez, had initially aimed to reduce unemployment to around 8%. The projections from the IMF overshadow the positive labor market numbers seen so far. The unemployment rate is expected to reach 11.6% by the end of this year, dropping to 11.3% next year, which is still higher than the golden age of the construction industry and almost double the forecasts for the entire eurozone.
The IMF’s projections should serve as a wake-up call to accelerate dialogue between social partners for the reform of unemployment benefits, following the failure to approve the government’s royal decree presented to the Congress of Deputies last December. The reform of unemployment benefits was seen as important because the new system was intended to incentivize participation in the labor market. The Spanish authorities hoped to achieve full employment with this reform. The IMF’s recent Article IV report on Spain highlighted the need for additional policies alongside the 2021 labor reform to achieve greater stability in national employment.
The projections also provide a mixed assessment of Spain’s fiscal health. The strong economic growth, with a GDP growth of 1.9% in 2024, will lead to a reduction in the debt-to-GDP ratio for the fourth consecutive year post-pandemic, dropping to around 106% in 2024. However, the IMF predicts that Spain will not be able to lower its deficit below 3% of GDP until at least the next decade. Despite these challenges, Spain is forecasted to lead economic growth among major European economies over the next two years, with GDP expected to rise by 1.9% in 2024 and 2.1% in 2025, outperforming countries like Germany, Italy, and France.
To maintain robust economic growth, Spain is expected to have higher inflation rates than its neighbors. The IMF forecasts an inflation rate of 2.7% in Spain for 2024, which is higher than the average for the eurozone. Rising oil prices, affected by OPEC supply cuts and Ukrainian attacks on Russian oil facilities, could contribute to Spain’s higher inflation rate. The IMF also warns of a potential global economic slowdown if oil prices continue to rise, affecting different regions to varying degrees. Despite these challenges, the IMF expects inflation to moderate in 2025, with Spain closing the year with an inflation rate of 2.4%.
The IMF also anticipates that Spain will continue to reduce its debt with the rest of the world, projecting a current account surplus of 2.5% of GDP for this year and 2.4% for the next. However, this surplus is seen as a sign of underinvestment, particularly in construction and transportation equipment. The challenge for the government is to continue deleveraging while minimizing its impact on economic activity and increasing investment. Spain’s economic outlook remains positive in terms of growth, but challenges such as high unemployment, fiscal deficits, and inflation will need to be addressed through comprehensive policies and reforms.
