The recession in Spain is projected to continue in 2013 as fiscal consolidation and high private sector indebtedness undermine domestic demand. Trading partner growth and cost competitiveness gains, along with improved financial conditions as interest rate spreads gradually go down, will help to spur a slow recovery in 2014. The unemployment rate is projected to rise to over 28% before stabilising. Inflation and wage pressures will remain subdued. Due to substantial consolidation efforts, the fiscal deficit is expected to continue to fall.
Boosting growth should be the government's number one policy priority. The government should aim to meet its fiscal consolidation targets in structural terms, but to let the automatic stabilisers operate fully. Further efforts have been announced to foster entrepreneurship and deregulate product markets, including in transport and professional services. Legal extension of collective wage agreements should be abolished fully to give firms more flexibility to hire in a situation of uncertainty and changing circumstances. Positive steps have been unveiled to improve labour market activation policies and labour matching, and these efforts should be pursued.