UPDATE 1-Spanish GDP could grow by 7.2% in 2021 if virus kept in check, IMF says

(Adds quotes from mission chief)

MADRID, Sept 30 (Reuters) - Spain’s economy could bounce back from its worst recession on record to grow by 7.2% in 2021 if the government can limit new coronavirus infections, the International Monetary Fund mission said on Wednesday.

The size, timing and composition of European Union-funded spending programs will also affect the pace of recovery, the fund said in a report, warning that output would take until 2023 to reach pre-pandemic levels.

“The uncertainty about the outlook is unprecedented and the risk is strongly to the downside”, Andrea Schaechter, head of the IMF’s Spanish Mission, told reporters.

The report said: “A failure to control new outbreaks, slower-than-anticipated progress on vaccines and treatments, a no-deal Brexit and escalation of trade tensions could subdue the outlook further.”

The use of EU funds to transform the economy will be critical, the IMF said. Schaechter called for some of the aid to be used for labour reform, encouraging long-term contracts with the creation of a new compensation fund.

Following coronavirus lockdowns, Spain’s economy contracted 17.8% in the second quarter from the previous quarter and 21.5% compared with the same quarter a year earlier.

The IMF expects GDP to slump by 12.8% in 2020.

To cushion the blow for companies and workers, economic support policies should be extended and scaled, and fiscal measures should be maintained to limit the risk of stress on the financial system, the IMF said.

Schaechter said the corporate sector required particular attention, with support for viable companies the main priority, while pension reforms and other long-term policies could take a back seat for now.

With some small and medium-sized firms likely to require a state bailout, the IMF suggested expanding the scope of Spain’s rescue fund -- currently reserved for supporting larger, strategic companies -- but said such equity support should be temporary and come with a clear exit strategy.

Following a deal between Caixabank and Bankia this month to create Spain’s biggest domestic bank, the IMF said additional consolidation would be an “adequate response to profitability challenges.” (Reporting by Belén Carreño, Nathan Allen and Jesús Aguado, Editing by Ingrid Melander and Timothy Heritage)