Bank of Spain downgrades economic forecast and warns of slower recovery

Recent developments in the way the Covid-19 pandemic is playing out may force the Spanish government to update its economic forecasts.

While a May projection that Madrid sent to Brussels envisioned a 9.2% drop in economic output in 2020, the Bank of Spain on Wednesday released a more pessimistic outlook that places the decline somewhere between 10.5% and 12.6%.

This is down from the central bank’s own previous forecast, which had expected gross domestic product (GDP) to retreat by 9% to 11.6%.

Although the end of the lockdown in Spain had created hopes of a strong recovery, fresh coronavirus outbreaks and travel restrictions imposed in late July put the brakes on economic activity, particularly in the hospitality industry.

The short- and medium-term economic outlook continues to be highly dependent on epidemiological developments, in respect of which there remains a high degree of uncertainty

Bank of Spain

“The third quarter has gone from more to less, and that means that the beginning of next year will be worse,” said Óscar Arce, the Bank of Spain’s director general for economics, statistics and research.

Under the two scenarios considered by the banking supervisor, in 2021 the economy could rebound either by 7.3% in the better situation, or by 4.1% in a scenario of more intense coronavirus outbreaks in the short term.

“The main difference between these two scenarios stems from the assumptions regarding the course of the pandemic over the coming quarters, which, in turn, determines the degree of severity of the containment measures that may be necessary and their consequent impact on economic activity,” said the Bank of Spain in a release.

Scenario 1 would only require containment measures of limited scope and affect mostly hospitality services, while in scenario 2 the restrictions required could have a greater impact on the service sector, but also affect other productive sectors.

It cannot be ruled out that, in the coming quarters, more unfavourable epidemiological developments than those considered in scenario 2 may materialize

Bank of Spain

The outlook talks about more modest growth in activity in 2022. “At the end of 2022, GDP would stand some two percentage points below its pre-crisis level in scenario 1, a gap that would widen to somewhat more than six percentage points in scenario 2.”

As for the impact of the Covid-19 crisis on the labor market, the banking supervisor estimates that unemployment could reach between 19.4% and 22.1% in 2021 if the ERTE furlough scheme is phased out.

Meanwhile, public finances are also expected to do poorly, with public debt soaring this year “by more than 20 percentage points in scenario 1 and by some 25 percentage points in scenario 2, to stand at 116.8% and 120.6% of GDP, respectively.” The deficit “will increase sharply in 2020, to stand at 10.8% and 12.1% of GDP in each of the two scenarios considered.”

The Bank of Spain warns that “the short- and medium-term economic outlook continues to be highly dependent on epidemiological developments, in respect of which there remains a high degree of uncertainty.”

As a result, “it cannot be ruled out that, in the coming quarters, more unfavourable epidemiological developments than those considered in scenario 2 may materialize.” On the other hand, these figures do not take into account the European recovery funds that have been allocated to Spain, and which the Bank of Spain admits could have a relevant impact.

English version by Susana Urra.