Why has the IMF changed its modeling of Spain’s economy?

The IMF has cut its forecast for Spain in 2014 by seven tenths of a percentage point. Among the large industrialized economies, Spain is the only one that has gone through such a big a correction, closer to the ones experienced by the emerging markets than the developed world. As a consequence, its GDP will have zero growth in 2014. The recovery is, once again, delayed one more year.

And, oddly enough, this is great news.

How so? Look at the numbers. In April, the Fund predicted 0.7 percent growth for Spain in 2013. But, by then, the Spanish Government had not announced a new round of fiscal adjustment. As a consequence, according to the IMF, the Spanish deficit was supposed to remain essentially constant–if not growing–for the foreseeable future.

Then, in May, the Spanish Government decided to continue the consolidation in 2014. The tax and spending measures will detract around 8 billion euros from the economy. That means around 0.8 percent of Spain‘s GDP. As a consequence, the Fund has decided to slash its growth forecasts, from 0.7 percent to zero.

It sounds terrible. But there is a silver line: Spain is reducing the fiscal consolidation’s impact on its economic growth. If the IMF had applied its models mechanically, it would have decided that May measures would make Spain fall again into negative growth in 2014. The Fund, however, has implicitly said that Spain can be approaching a quarter-on-quarter zero growth (year-on-year it is still deeply into negative territory) that could last around two or three semesters, with little movements into positive or negative numbers, while, at the same time, undergoing further fiscal adjustment.

Until later this month, when it releases two more documents (one, on financial stability in the world, and another one on the Spanish economy), we will not know the exact answer to why the Fund has changed its macroeconomic modeling of Spain. But there are signs of what it may be thinking. Spanish economy is gaining competitiveness, as shown by the exports numbers. This, in turn, can trigger some uptick of investment. In the longer term, supply-side measures, such as the decision to end the ‘Balkanization’ of the domestic market by banning many of the regional governments’ regulations, together with the labor and professional services reforms, can foster more growth.

It is early to tell the extent of these transformations. And this change of heart (if the IMF has such a thing as a heart) does not obviate many of the headwinds that Spain has. Construction (which was 19 percent of the pre-crisis GDP) and bank lending are in free fall, and exports are undoubtedly going to be hampered by the slowdown of Latin America–in particular, Brazil–predicted by the Fund. Fiscal consolidation has not touched pensions and Social Security. The internal consumption will continue frozen, to put it mildly. And, thanks to Germany’s reticences to advance towards a banking union, the eurozone financial market is as fragmented that can barely be considered a unified market.

But all these factors do not alter the main proposition–the economy of Spain is changing for the better. The IMF thinks that the groundwork for future growth is being laid.