Brussels lowers growth forecast for Spain but projects strong rebound

The members of the European Union have had very little time to enjoy the respite provided by an economic rebound in the third quarter of the year. On Thursday, the European Commission released its Autumn 2020 Economic Forecast, which projects fresh downturns as the continent grapples with another wave of the coronavirus pandemic.

In Spain, Brussels is projecting that gross domestic product (GDP) will contract by 12.4% this year, particularly due to steep falls in the tourism and hospitality sectors. The European executive is also reducing projected growth for 2021: under the new forecast, the Spanish economy is set to expand by 5.4% in 2021 and by 4.8% in 2022.

The European forecast is in line with the more pessimistic scenarios contemplated by the Bank of Spain and by the International Monetary Fund (IMF), which is projecting a 12.8% contraction of the Spanish economy this year. The Spanish government had calculated a drop in output of 11.2%.

Growth will return in 2021 but it will be two years until the European economy comes close to regaining its pre-pandemic level

Paolo Gentiloni, EU Economy Commissioner

Recent developments have forced Brussels to revise its July forecast downward, and to push part of the recovery into 2022. In July, the Commission had projected a Spanish GDP contraction of 9.4% for 2020 followed by growth of 7% in 2021.

But the second wave of the coronavirus pandemic has led to closures in the services sector across the continent. In Spain, there is the added impact of the travel restrictions that were imposed on Spanish destinations over the summer months.

“After the deepest recession in EU history in the first half of this year and a very strong upswing in the summer, Europe’s rebound has been interrupted due to the resurgence in Covid-19 cases,” said EU Economy Commissioner Paolo Gentiloni at the report presentation. “Growth will return in 2021 but it will be two years until the European economy comes close to regaining its pre-pandemic level.”

Brussels believes that Spain’s economy will contract more than Italy’s this year (12.4% versus 9.9%) but will rebound faster in 2021 (5.4% versus 4.1%) and in 2022 (4.8% versus 2.8%). Neighboring France is expected to experience growth of 4.1% in 2021 and 2.8% in 2022.

Spain’s deficit, which was 2.9% of GDP in 2019, is expected to balloon to 12.2% in 2020 “due both to the contraction of tax bases affecting revenues as well as to policy measures to counteract the impact of the pandemic,” reads the report. The deficit should slowly narrow to 9.6% in 2021 and 8.6% in 2022. Public debt is also expected to soar by nearly 25 percentage points to 120.3% of GDP in 2020, then increase slightly to 122% in 2021 and 123.9% in 2022.

The report warns that “the uncertainties and risks surrounding the Autumn 2020 Economic Forecast remain exceptionally large” due to the possibility of a worsening of the pandemic.

English version by Susana Urra.