Bank of Spain raises economic growth forecast to 6.2%

Central lender believes activity will return to pre-pandemic levels by the end of 2022 thanks to reopenings that are supported by improved coronavirus figures

Customers at a sidewalk café in Barcelona's Plaza Real.
Customers at a sidewalk café in Barcelona's Plaza Real.Albert Garcia

The economic outlook for Spain has slightly improved as the impact of the coronavirus pandemic eases. Declining coronavirus cases and deaths, coupled with a steady vaccination drive, are stimulating activity, consumption and public confidence. As a result, the Bank of Spain has slightly raised its 2021 growth prospects for the Spanish economy from 6% to 6.2%. For next year, the forecast is being bumped up from 5.3% to 5.8%.

Following an interruption of growth caused by the stricter coronavirus restrictions in force in late 2020 and early 2021, the economy is expanding again as reopenings get underway. Figures have been improving since March, said Óscar Arce, the Bank of Spain’s director general for economics, statistics and research.

This is especially noticeable in the number of contributors to Social Security, the drop in furloughed workers on the government’s ERTE scheme, mobility indicators, rising exports and confidence surveys. The polls are reflecting a robust industrial expansion and growth in services. The most recent available figures on fuel consumption remain around 10% below pre-pandemic times.

The Bank of Spain is expecting gross domestic product (GDP) to grow 2.2% in the second quarter of the year, followed by a vigorous surge during the second half of 2021 as remaining restrictions are lifted, consumption returns, European recovery funds get spent and the tourism industry starts to recover. The central lender is expecting to see half as much tourism in Spain during the third quarter as in pre-pandemic times, a rate that will presumably rise to 80% between July and September 2022.

This improved outlook means that pre-pandemic activity levels will return three months earlier than previously thought: the Bank of Spain now places this moment in the last quarter of 2022, instead of the first quarter of 2023. If the forecast is correct, Spain’s GDP will return to pre-crisis levels towards the end of next year, nearly three years after the pandemic broke out. The annual average unemployment rate is expected to be 15.6% in 2021 and 14.7% in 2022.

The economic recovery is based partly on the vaccination drive, which is lowering the coronavirus incidence rate among risk groups, making it possible to reopen economic activities. Another pillar of the recovery is the expansive policies of the European Central Bank and the states, which are working to ensure that corporate insolvencies do not have a knock-on effect on financial conditions.

As for the EU recovery funds, the central lender believes that this year Spain will only spend half of what the government had originally planned, meaning that part of the stimulus effect will be delayed to next year. And while the Spanish government holds that 100% of the EU’s non-repayable grants will have been spent by the end of 2023, the Bank of Spain believes that this figure will be closer to 80%. By late 2023 Spain’s GDP will have improved by 1.8 percentage points thanks to the European funds, according to the Bank of Spain’s estimates.

The supervisor also feels that risk levels are going down, although there is still a lot of uncertainty over issues such as the new coronavirus variants, or what will happen with the large savings that were accumulated during the pandemic. The lender’s central scenario shows these savings declining very slowly for several reasons: one is that they are concentrated among high-income individuals who are less likely to spend it quickly. Another reason is that a portion of these savings was accumulated due to the closure of services such as food and drink establishments, and it is difficult to recover this kind of lost consumption. Finally, soaring public debt levels make it likely that there will be tax hikes.

The lender has identified another risk: that excess debt will lead to a surge in corporate insolvencies. The Bank of Spain warns that the government’s assistance program must be rolled out quickly and efficiently.

Depending on the evolution of all these risks, economic growth this year could range between 4.6% in an adverse scenario and 6.8% in a favorable one. However, the public deficit will remain stuck at around 4% of GDP in 2022 and 2023 unless steps are taken, and public debt will be approximately 118% of GDP during that period. Inflation has been experiencing relevant hikes, but Arce said these are due to temporary factors such as production chain bottlenecks, and that it will be a temporary event. The consumer price index (CPI) will be 1.9% this year and drop to just above 1% in 2022.

English version by Susana Urra.

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