Spain: Unemployment will rise
GDP is projected to fall in 2009, as residential construction continues to contract, before recovering modestly in 2010. Unemployment will continue to increase substantially. Inflation should recede as a large negative output gap opens up and commodity prices moderate, while falling imports should significantly reduce the current account deficit.
Discretionary fiscal policy easing of around 1.5% of GDP has been supporting growth in 2008. The automatic stabilisers should also be allowed to operate in 2008 and 2009. Steps will then need to be taken to curb spending pressures in the longer term. Eliminating the indexation of wages to past inflation would preserve competitiveness, mitigating the downward cycle. With potential growth expected to decline in line with lower immigration flows and slowing rises in female participation, further steps to nurture competition in product and services markets need to be taken to increase productivity growth.