Spain’s GDP could contract 11.5 percent in 2020 and grow seven percent in 2021, according to the latest ‘Spain Economic Outlook’ report, which was presented this Tuesday by Jorge Sicilia, Chief Economist at BBVA Group and Director of BBVA Research; Rafael Doménech, BBVA Research Head of Economic Analysis; and Miguel Cardoso, BBVA Research's Chief Economist for Spain. The contraction that is expected in 2020 represents a downgrade from the previous report’s forecast, which estimated an eight percent drop in GDP this year. The downward revision is mainly due to the fact that lockdown measures were in place longer than anticipated and these restrictions had a greater impact on demand, like in other European countries. Still, the reduction in number of COVID-19 infections and the easing of restrictions has led to a strong recovery. The ambitious policy announcements in Europe and a significant fiscal stimulus in Spain reinforces the expectation that this trend will continue. Even so, the risks continue to tilt to the downside in a climate of continued heightened uncertainty.
BBVA Research estimates that the reduction in business activity could exceed 20 percent in the first quarter of the year compared to the same period in 2020. “The downward revision of growth in 2020 is explained by the fact that lockdown measures were in place longer than anticipated; the restrictions had a greater than expected impact on domestic demand; reduction in consumption was keenly felt by domestically produced goods and services; and the tourism industry suffered contraction,” the ‘Spain Economic Outlook’ 2020 Q3 report indicates.
GDP growth forecast of 10% in the third quarter of 2020
Containing the epidemic allowed for the easing of restrictions, which was followed by a particularly strong economic recovery starting from the middle of the second quarter. If the recovery continues, it could lead to a ten percent increase in GDP in the third quarter. Since the beginning of May, various indicators have been pointing to a revival of economic activity, in line with the easing of limitations on movement and the opening of businesses. This increased business activity is most dramatic in those provinces that first began with the reopening. Furthermore, each phase upgrade has been accompanied by improvements in consumption levels, in some sectors even outpacing pre-crisis levels. All this could lead to an increase in household consumption, reaching close to 20 percent in the third quarter.
With respect to the European economy, BBVA Research emphasizes that, although there has been an inflection point, more expansionary policies pave the way for more positive scenarios, provided the epidemic remains under control. Two positive announcements stand out: on one hand, a new recovery fund — ‘Next Generation EU’ — which is equivalent to 5.4 percent of the EU GDP. BBVA Research sees the fund’s size, its terms, and the composition to be sufficient and believes it to be an important step on the way to greater fiscal integration across Europe, despite the outstanding details to be ironed out. The ECB, on the other hand, has continued expanding its balance sheet, with a sharp increase in liquidity (through its TLTRO III auctions) and guaranteeing the proper implementation of monetary policy in the eurozone. “This, together with the public guarantee programs, has facilitated an exceptional expansion of business lending in the second quarter of the year.
An expansion of public spending in Spain and a rising deficit
In Spain, the public spending expansion has accelerated and the deficit could reach nearly 15 percent of the annual GDP. BBVA Research calculates that the measures to stimulate domestic demand will reach at least three percent of the 2020 GDP. Notable among said measures are the approval of a minimum living wage, industry programs (automotive and tourism industries), the supply of liquidity to the most impacted businesses, the extension of the government furlough scheme (ERTE), and an allowance to cover forced interruption to business activity through September 2020. Given this landscape, it expects public finances to take a considerable hit.
Regarding the flow of credit in the economy, BBVA Research points out that the supply of guarantees, together with the ECB’s activity and that of the banking sector, has managed to prevent a greater dip in the Q2 GDP, of approximately 4.5 percentage points. The balance of business lending made by banks to non-financial companies increased in May at a year-on-year pace not seen since the end of 2008 This growth is mainly due to the cooperative efforts between the monetary authority, government administrations, the banking sector, and the business community.
Even so, the risks continue to tilt to the downside in a climate of continued heightened uncertainty, BBVA Research maintains. The main obstacle to recovery continues to be the unknowns about how the pandemic will evolve and the effectiveness of the measures taken to stanch the spread of the disease. That said, more positive scenarios could find room for themselves in upcoming quarters. More upbeat scenarios would require that the good example provided by some European policies would need to be further strengthened and consensus building at a national level is needed to address the measures necessary to stimulate growth capacity.