Spain’s economy, with its high reliance on services and tourism, has been hit hard by the lockdowns and travel bans imposed by the country’s socialist coalition government to fight the coronavirus pandemic. The services sector accounts for 68% of Spain’s gross domestic product (GDP) and has remained roughly at that level for the past decade. Within this sector, tourism — which traditionally represents 12% of GDP — fell to 4% in 2020. This means that more than three-quarters of last year’s decline can be attributed to the crisis in the tourism industry.
“The Spanish economy could possibly have shrunk by as much as 11% in 2020,” says Jorge Sicilia, chief economist at BBVA. “We are looking for a return to growth in 2021 of perhaps 5.5%, rising to 7.0% in 2022. The increase in GDP for the third-quarter of 2020 was above expectations, but there was a sharp decline in the last quarter of the year. We can look forward to a significant upswing in the second half of this year.”
The structure of the country’s economy is a significant factor in this downturn
Mr Sicilia bases his forecast on the rollout of an intensive coronavirus vaccination programme across Spain and the rest of the EU; an expansive fiscal policy; the implementation of the Next Generation EU (NGEU) recovery plan; measures put in place by Spanish government and the European Central Bank (ECB); and a reserve of productive capacity. “The key factors in this economic upsurge will be an efficient use of the NGEU funds and a consensus on reforms to boost the Spanish economy’s growth potential,” he says.
Spain has been one of the western European countries hardest hit by the pandemic, partly due to the large contribution to its economy of sectors particularly sensitive to social distancing. Mr Sicilia’s view are shared by most economic analysts. Fitch Ratings projects a GDP decline of 11.7% in 2020, followed by a recovery of 5.3% in 2021 and 6.6% in 2022, although the rating agency warns of a high degree of uncertainty ahead.
Fast growth stopped in its tracks
Jorge Sicilia. BBVA
The Spanish economy was growing at one of the fastest rates in Europe before the onset of the pandemic which, from a macroeconomic perspective, makes it one of the worst affected countries in the EU. The government imposed a stringent lockdown in the first coronavirus wave; however, the country has suffered a stubborn recurrence of the virus, resulting in key downside risks, including the prolongation of the health crisis, a languishing tourism industry that is prone to permanent damage and persistent elevated unemployment.
Ángel Talavera, head of European economics at Oxford Economics, says Spain has taken the biggest GDP hit among the eurozone countries — an unprecedented fall that some observers say can only be compared with the decline suffered during the 1936–1939 Spanish civil war.
“The structure of the country’s economy is a significant factor in this downturn,” he says, pointing, like most other analysts and economists, to Spain’s heavy reliance on tourism, which was devastated last year. “We can also say that the government’s response was not as vigorous as in other countries, though the magnitude of the coronavirus impact was such that no strategy could have fully protected the economy,” he adds.
Spain’s high proportion of small and medium-sized enterprises (SMEs) has also meant employment has been harder hit than in most other EU countries. Likewise, the fiscal response — although vigorous — has not been as robust as elsewhere, and fewer businesses have been able to adapt to remote working procedures.
Debt mitigation measures
The banks have been working closely with the government to relieve the debt burden on individuals and businesses. So far, they have extended moratoriums on debt repayment to nearly 600,000 mortgage holders for a total of €22.6bn, in line with the government’s scheme for confronting the crisis. Banks have also taken the initiative to grant moratoriums amounting to €31.8bn to mortgage holders that do not meet the government’s criteria. In accordance with government policy, the banks have granted loan and mortgage deferments to 1362 operators in the tourism sector.
“The short-term outlook is quite negative and will be determined to a large extent by the health situation and the vaccination rollout programme,” says Mr Talavera. “If this is implemented efficiently, we can expect to see a return to strong economic recovery, supported as well by the return of tourism and increased consumer spending.
“The growth prospects for the second half of 2021 are positive, but it is equally important to understand the magnitude of the economic collapse. The country will have to wait until 2022 to return to the GDP level seen before the crisis.”
Alex Muscatelli, sovereign credit analyst at Fitch, says: “The Covid-19 pandemic has had an increasingly significant impact on the Spanish economy and the sovereign fiscal position. We expect Spain’s economy to recover in 2021, especially when the vaccine rollout facilitates a material easing in social distancing measures and provides a powerful boost to contact-intensive industries, which make up a large share of the economy.
“The combination of government measures to address the effect of health restrictions on business activity and the sharp decline in economic activity will translate into a sharp increase in the public deficit this year. We expect the deficit to fall back in 2021 and 2022, to 9.6% and 7.5% of GDP, respectively. The cyclical recovery and the reversal of coronavirus-related support measures will be the main drivers of the decrease in the deficit.”
Bleak picture: S&P forecasts an 11.3% GDP decline for Spain in 2020
Unemployment on the up
Spain’s traditionally high rate of unemployment poses another threat to a quick recovery. Growing unemployment has, so far, been mitigated by the government’s support measures, in particular the broad extension of short-time work schemes. At the peak of the pandemic in spring 2020, 3.4 million workers were covered by short-time work schemes, falling to 750,000 in November. “As these measures are withdrawn over the next year, we expect unemployment to rise, averaging 18.4% in 2021,” says Mr Muscatelli.
Marion Amiot, senior European economist at S&P Global Ratings, forecasts an 11.3% GDP decline for Spain in 2020, the steepest drop expected in Europe, as the country suffers from lost tourism revenue. “A recent spike in infections and ensuing social-distancing measures should lead to another quarter of negative economic growth in the fourth quarter of 2020,” she says.
As [government support] measures are withdrawn over the next year, we expect unemployment to rise, averaging 18.4% in 2021
“We think measures to contain the pandemic’s spread will ease only gradually over the first quarter of 2021, so subdued growth is expected early in the year. Assuming availability of a vaccine by mid-2021, the country should see a solid tourism season in the second half. Spain is also set to be one of the main beneficiaries of EU support, enhancing recovery via investment and employment creation,” she adds.
Future recovery hopes
Olivier Chemla, senior analyst at Moody’s Investor Service, believes the country’s exposure to tourism and hospitality, stricter lockdowns and the prevalence of SMEs means it will be among those worst hit in 2021. “However, base effects, together with the government’s policy efforts, sizeable EU funding and a much more balanced economy, will drive a robust recovery in 2022,” he says.
“Spain’s fiscal trends will likely mirror economic developments, with a very large budget deficit in 2021 followed by some improvement next year. As a result, debt will reach more than 120% of GDP this year — an unprecedented level, which is among the highest in the world.”
Mr Chemla believes the favourable funding environment, assisted by the ECB’s policy support, mitigates any immediate credit pressure. However, a credible strategy to reduce debt over the longer term is crucial to any improvement in Spain’s credit profile. He adds that grants and loans included in the NGEU recovery plan could effectively double public investment in coming years compared to current levels.
“That leads us to raise our real GDP growth forecasts by a full percentage point in every year between 2022 and 2024,” he says. “A commitment to fiscal consolidation and structural reforms tied to the funding could also give confidence that the current very high public debt levels can be gradually reduced again over the coming years.
“The prospect of large EU funding could provide stronger incentives than in the past years to relaunch structural reforms. The pension system could be an area where a renewed reform push may be feasible. On the labour market, the government will likely focus on measures to reduce the widespread use of short-term employment contracts, but major changes are unlikely. The passage of the 2021 budget, which the government must submit to the European Commission by October 15, will be the first key test.”
