The path to recovery from the coronavirus crisis is proving longer than expected, at least for Spain. The Organisation for Economic Co-operation and Development (OECD) has sharply reduced the country’s projected growth from 6.8% to 4.5% in 2021, and from 6.6% to 5.5% in 2022. For 2023, the Paris-based organization is forecasting growth of 3.8%.
The OECD’s forecast follows similar downward reappraisals by the International Monetary Fund (IMF) and the European Commission, both of which reduced Spain’s growth prospects after the National Statistics Institute (INE) said in September that the Spanish economy had grown only by 1.1% in the second quarter of this year, instead of the 2.8% reported earlier as a preliminary figure.
That early estimate of 2.8% had led to strong growth forecasts for Spain by the OECD and other organizations. But the INE’s revised September figures led to reappraisals that are pouring cold water on the Spanish executive’s optimistic forecasts about a quick rebound from the crisis.
Last year, the country’s gross domestic product (GDP) plunged by a historic 10.8%, the biggest drop since the Spanish Civil War in the late 1930s. The economy is now growing, but it is doing so at a slower pace than forecast by the government of Prime Minister Pedro Sánchez, upon whose estimate next year’s budget is based.
The Spanish economy is not expected to return to pre-pandemic levels before the first three months of 2023. “Domestic demand will be the main driver of growth as higher confidence, improving labor market conditions, favorable financing conditions and the Next Generation EU funds boost private consumption and investment,” reads the OECD report released on Wednesday.
High vaccination rate
In its newest Economic Outlook, the OECD underscores Spain’s high vaccination rate and eased restrictions as factors that have driven growth. “Thanks to a fast vaccination uptake (80% of the total population fully vaccinated in mid-November) and the fall in cases, regional authorities have eased restrictions further, allowing the additional reopening of the service sector. Consequently, the recovery became broad-based, with a robust improvement in service activity and confidence indicators, and GDP grew by 2% in the third quarter,” reads the report.
Spain also has another tool at its disposal: the €70 billion from the Next Generation EU funds. According to the OECD, around 85% of this amount will be used by late 2023, in line with the authorities’ plans. The OECD also mentions the government’s job retention schemes, direct aid, temporary tax cuts and price caps to protect vulnerable consumers as some of the policy initiatives that have helped drive growth.
On the other hand, production bottlenecks and a shortage of raw materials could affect recovery, although the OECD said that the impact on Spain is smaller than in other European Union members. The second adverse trend is inflation, which the organization expects to be 2.9% this year and 3.2% in 2022 before dropping to 1.5% in 2023.
The report also notes that the labor market in Spain has been resilient as “job retention schemes have played a key role in limiting job losses and are enabling a faster recovery. The increase in Social Security affiliations and the decline in the number of workers on job-retention schemes to 190,718 (around 6% of the peak in April 2020) have brought effective employment rates almost back to pre-pandemic levels.”
However, the report notes that Spain’s unemployment rate remains high at 14.7%, and that high rates of youth (30%) and long-term unemployment (32%) persist. The OECD expects the overall jobless rate to be 14.2% in 2022 and 13.6% in 2023.
The crisis has also made a big dent in public finances, both because of the record GDP drop last year and because of the government’s financial effort to deal with the health and economic crises. As a result, Spain’s public deficit was 11% of GDP at the close of 2020. The difference between government receipts and outlays is projected to drop to 8.1% of GDP in 2021, 5.4% in 2022 and 4.2% in 2023.
Meanwhile the debt-to-GDP ratio climbed from 95.5% of GDP in 2019 to 120% in 2020. This metric is expected to fall to 115.9% by 2024. Spain’s public debt surpassed 100% of its economic output in 2016.