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ECONOMY

Spanish growth outstrips stalled eurozone partners

Spain’s GDP growth accelerated to 1 percent in the second quarter, making it one of the fastest growing countries in the eurozone but the IMF has warned it must stay on course with its economic reforms.

Spanish growth outstrips stalled eurozone partners
The country has emerged from five years of recession. Photo: AFP

The Eurozone as whole grew less than expected during the second quarter, according to estimations published by the European Union’s statistic office on Friday.

GDP grew by just 0.3 percent across the 19 country euro area – slightly less than expected – and yet Spain recorded the second highest growth, after Latvia.

Spain's growth of 1 percent GDP during April to June after recording a 0.9 percent rise during the first three months of the year.

The positive data came as the IMF warned Spain’s government that it must stay the course on economic reforms ahead if it wants generate growth and reduce its sky-high unemploymentrate, ahead of a year-end general election.

“The clearer we are in not reversing existing structural reforms and fiscal consolidation, the stronger is the defence against any external risks,” said Helge Berger, chief of the IMF mission in Spain following the publication of the body's annual report on the country.

The Washington-based IMF warned that backtracking on reforms would “create uncertainty and damage the recovery, especially if external conditions deteriorate.”

Spain is benefiting from a weaker euro which helps boost exports and lower oil prices and is less exposed to “external contagions” such as the Greek economic crisis, it added.

The country emerged in 2013 from five years of on-off recession and the government forecasts the economy will grow by 3.3 percent this year — more than twice the average forecast for eurozone countries.

Prime Minister Mariano Rajoy's conservative government credits new rules adopted in 2012 for making it cheaper for firms to lay off workers and limiting the power of unions to negotiate collective-bargaining agreements across entire industries or regions for the recovery.

SEE ALSO: What recovery? Spaniards reject government spin

The IMF said Spain needed to adopt “additional reforms” to take advantage of the economic recovery and reduce the unemployment rate, which stood at 22.4 percent in the second quarter, the second-highest rate in the eurozone after that of bailed-out Greece.

It recommended further reforms of the labour market as well as measures to address the lack of competitiveness of Spanish firms.

The IMF maintained its forecast of economic growth of 3.1 percent in Spain this year, slightly below the 3.3 percent expansion predicted by the Spanish government.

It sees the Spanish economy, the eurozone's fourth largest, expanding by 2.5 percent in 2016 while the government predicts growth of 3.0 percent.

While positive for Spain the latest Eurostat data showed that France’s struggling economy had stagnated in the second quarter of 2015 in contrast to their German neighbours.

The German economy, Europe's biggest, grew by 0.4 percent in the second quarter of 2015, fractionally faster than in the preceding three months, but slightly short of analyst expectations.

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ECONOMY

How is Denmark’s economy handling inflation and rate rises?

Denmark's economy is now expected to avoid a recession in the coming years, with fewer people losing their jobs than expected, despite high levels of inflation and rising interest rates, The Danish Economic Council has said in a new report.

How is Denmark's economy handling inflation and rate rises?

The council, led by four university economics professors commonly referred to as “the wise men” or vismænd in Denmark, gave a much rosier picture of Denmark’s economy in its spring report, published on Tuesday, than it did in its autumn report last year. 

“We, like many others, are surprised by how employment continues to rise despite inflation and higher interest rates,” the chair or ‘chief wise man’,  Carl-Johan Dalgaard, said in a press release.

“A significant drop in energy prices and a very positive development in exports mean that things have gone better than feared, and as it looks now, the slowdown will therefore be more subdued than we estimated in the autumn.”

In the English summary of its report, the council noted that in the autumn, market expectations were that energy prices would remain at a high level, with “a real concern for energy supply shortages in the winter of 2022/23”.

That the slowdown has been more subdued, it continued was largely due to a significant drop in energy prices compared to the levels seen in late summer 2022, and compared to the market expectations for 2023.  

The council now expects Denmark’s GDP growth to slow to 1 percent in 2023 rather than for the economy to shrink by 0.2 percent, as it predicted in the autumn. 

In 2024, it expects the growth rate to remain the same as in 2003, with another year of 1 percent GDP growth. In its autumn report it expected weaker growth of 0.6 percent in 2024.

What is the outlook for employment? 

In the autumn, the expert group estimated that employment in Denmark would decrease by 100,000 people towards the end of the 2023, with employment in 2024  about 1 percent below the estimated structural level. 

Now, instead, it expects employment will fall by just 50,000 people by 2025.

What does the expert group’s outlook mean for interest rates and government spending? 

Denmark’s finance minister Nikolai Wammen came in for some gentle criticism, with the experts judging that “the 2023 Finance Act, which was adopted in May, should have been tighter”.  The current government’s fiscal policy, it concludes “has not contributed to countering domestic inflationary pressures”. 

The experts expect inflation to stay above 2 percent in 2023 and 2024 and not to fall below 2 percent until 2025. 

If the government decides to follow the council’s advice, the budget in 2024 will have to be at least as tight, if not tighter than that of 2023. 

“Fiscal policy in 2024 should not contribute to increasing demand pressure, rather the opposite,” they write. 

The council also questioned the evidence justifying abolishing the Great Prayer Day holiday, which Denmark’s government has claimed will permanently increase the labour supply by 8,500 full time workers. 

“The council assumes that the abolition of Great Prayer Day will have a short-term positive effect on the labour supply, while there is no evidence of a long-term effect.” 

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