Spain's biting recession may end soon but the outlook is tough and Madrid must do more to battle the country's unacceptably high unemployment rate, the IMF warned Wednesday.
Spain's economy, still reeling from a 2008 property market crash, fell into a double-dip recession in 2011 and the unemployment rate has since soared to more than 27 percent.
Prime Minister Mariano Rajoy's conservative government has pursued an austerity policy even in the face of mass protests in the streets, but it now says the recession is close to bottoming out.
Economy Minister Luis de Guindos said Tuesday that the country was "coming out of the recession" and the previous day Budget Minister Cristobal Montoro said the economy was at a turning point.
The International Monetary Fund, in an annual review of the eurozone's fourth-largest economy, agreed that the contraction may be coming to an end.
But it cautioned that tough times lay ahead.
"While there are signs the economic contraction may end soon, the outlook remains difficult," the Washington-based Fund said in a report.
The IMF said it expected the Spanish economy to start to grow later this year and to pick up to a pace of one percent in the medium term, with only "limited" gains in employment.
"Spain, historically, has never generated jobs with a growth lower than 1.5 percent. So we need growth that is stronger or more job-friendly," the head of the IMF mission in Spain, James Daniel, said at a Madrid news conference following the release of the report.
Spain's borrowing costs soared in mid-2012 as investors fretted about its bulging annual deficits, soaring debt, recession and joblessness, pushing the country close to an international bailout.
In the end, Spain avoided a full-blown rescue but was thrown a 100-billion-euro credit line by its European Union partners to clean up bad loan-ridden banks.
So far, Madrid has used only 41.3 billion euros of that money.
The IMF welcomed Spain's recent strong export performance but cautioned that corporate and consumer struggles with high debt could slow the economy.
Spain's trade deficit was halved in April to 1.642 billion euros from 3.355 billion euros during the same month last year as exports soared, especially to China and other fast-growing emerging markets, the Economy Ministry said Wednesday.
-- Need to raise reform effort --
Financial market pressures, too, could return, it said.
"This outlook calls for raising the reform effort to the level of the challenge," the IMF report said.
"Spain needs to deliver on its announced program and indeed go further in some areas. The focus should be a on a pro-jobs strategy that allows the economy to grow and hire."
The IMF urged Spain to give more training to the young and unskilled; make it easier for firms to change work conditions rather than fire people; and to narrow a "damaging divide" between highly protected employees on permanent contracts and vulnerable workers on temporary contracts.
At the same time, Spain's banks remain vulnerable despite the European-financed rescue, it said.
"The banking system is now significantly stronger but risks remain," the IMF report said.
The weak economy could trigger a "negative feedback loop", it warned, with a lack of credit and weak economic activity feeding off each other, further damaging the value of bank assets and putting pressure on profits.
Banks must put a priority on strengthening capital, cleaning up bad loans and assets and easing the supply of credit to business, the IMF said.
Spain's efforts to pare its budget deficits -- it is in the midst of a three-year effort to save 150 billion euros ($200 billion) by 2014 -- must seek to avoid hurting growth, it added.
"The required fiscal consolidation needs to be as gradual and growth-friendly as possible," the IMF said, in an apparent change of tone from its usual message of fiscal rectitude.
Spain's deficit is still "very large" and needs to be reduced, the Fund said.
"But reducing it too quickly would hurt growth," it said.