OECD upgrades Spain's growth forecast and highlights the robustness of its recovery thanks to the reforms undertaken

OECD forecasts for Spain have improved for 2017 over last autumn's. The economy will grow by 2.5% (up by two tenths) and unemployment rate will fall to 17.5% (two tenths less), in line with the Government's forecasts.

The OECD considers that the Spanish recovery is one of the most robust, due to the broad range of structural reforms carried out, the clean-up of the financial system, and the country's fiscal policy. It points to other growth drivers common to other countries such as an expansive monetary policy, low oil prices, and the depreciation of the Euro.

Spain's internal risk is centred on the difficulty of pushing through the reforms without the government having a sufficient parliamentary majority. External risks include uncertainties resulting from possible turbulence in the financial markets, the slowdown of world growth, trade wars, a disorderly Brexit, and a deterioration of the European banking system.

In this respect, the OECD underlines that the Spanish banking system is comfortably compliant with regulatory solvency requirements. It recognises that the banking reform helped stabilise the financial sector and contributed to credit growth by improving entities' access to the markets. The sector is now significantly stronger, the report stresses. Not only have measures been put in place to restore the financial stability of financial institutions, but the regulation and supervision of the sector has also been strengthened.

With regard to fiscal policy, the OECD considers that since 2012 Spain has made a considerable effort to reduce its public deficit, and insists on the need to meet the targets to reduce the high level of public debt. As well as a new reform programme from the public administration, the OECD considers that the reforms of the pension system already implemented have reduced the risks threatening the sustainability of the system, but believes that further measures are required. Regarding the tax system, the OECD supports recent measures concerning special taxes and recommends keeping a watchful eye on the impact of the recent corporate income tax reform on major corporations.

Regarding the job market, the OECD points out the growing inequality in terms of income distribution and the growth of poverty during the crisis, mainly as a result of high unemployment. The report says that the poverty rate fell in 2014 and expects this trend to continue as a result of improving job market conditions. It considers that the Spanish tax and transfer system helps reduce poverty and inequality, although it calls for greater support to be given to families with children. In this respect, the OECD proposes strengthening social aid systems and active employment policies with a view to achieving targets, spending more efficiently and increasing digitisation.

The report values very positively the results of the 2012 labour reform and stresses that it helped put a brake on job destruction as from 2013 and improved the likelihood of temporary contracts, especially those of young people, becoming permanent. However, there continues to be too much temporary employment, there are training shortfalls, and a higher than EU average percentage of low paid jobs. In this respect, the report finds it necessary to improve vocational training, especially dual vocational training, and to seek greater convergence between dismissal costs for temporary and permanent staff.

The OECD points out a number of reforms which it considers necessary in order to ensure sustainable economic growth in the medium term. It is necessary to reduce regulatory barriers restricting competition (to continue implementing the Market Unity Act and the liberalisation of professional services). It is also necessary to seek greater efficiency in bankruptcy proceedings; the reforms of 2014 and 2015 made some progress in this respect, but there is still a need for further measures, such as the reduction of the five year period for the waiving of debts for operationally viable but indebted enterprises. Finally, the OECD considers that it is necessary to improve the system for supporting innovation.