the euro zone

The magic number

Predictions for the growth rate of the Spanish economy this year have almost reached the magic number of 3.2% - the rate at which it expanded in 2016. On Tuesday, the IMF announced that the country’s economic expansion will be 3.1% of GDP in 2017, thereby increasing its April forecast of 2.6% by half a percentage point. This upward revision is the latest instalment of a numbers game in which the Spanish government is also a key participant.

The IMF’s most recent tweak to its 2017 economic forecast for Spain prompts one to wonder who is following whom in the race to get to 3.2%. Mariano Rajoy announced a couple of weeks ago that he expects Spain’s economy to grow by 3%, rather than the 2.7% the Popular Party had previously projected. The IMF’s most recent forecast for 2017 is now in line with the Bank of Spain’s projection of 3.1% economic expansion this year. The Bank announced that figure in June, thus cancelling its original estimate of 2.8% GDP expansion this year.

As I wrote here two weeks ago, this ever-increasing optimism obscures issues still troubling the Spanish economy. Indeed, in announcing its latest revision to Spain’s economic forecast, the IMF warned that the country’s public debt (100% of GDP) and unemployment rate (18%) are still too high. When the Washington-based fund increased its growth projection in April, it did so with the same caveats - and presumably will do so again the next time it tweaks its 2017 forecast for Spain.

This time, the IMF also said of Spain that “the momentum created by past reforms may be bigger than estimated”. Though there is clearly truth to this, it is exactly the kind of thing not to say to a government already coasting: except for passing a long-delayed 2017 budget in June, Rajoy’s administration has done little else since regaining office last autumn. This is partly because it only commands a minority in a deeply fractured congress. But it is also because the Popular Party relies too much on impressive macroeconomic statistics to demonstrate its supposed competence. So long as external bodies such as the IMF keep upping their growth forecasts for Spain, Rajoy can carry on telling a positive story about the Spanish economy.

The Spanish prime minister also claims that he is dealing with the country’s unemployment problem by creating 500,000 new jobs a year. Most of these new positions are contracts for just a few days or weeks of work, though, so their creation leads to more, not less, instability in the labour market. Yet it’s only a matter of time before Rajoy’s government increases its own projection for the Spanish economy in 2017, thereby reaching the magic number of 3.2%.