Spain’s economy shrank 11% in 2020, in biggest drop since Civil War

Output grew 0.4% in the fourth quarter but it was not enough to compensate for the damage caused by the coronavirus pandemic

Empty tables at the market in Santiago de Compostela in Galicia, which has shut down food and drink establishments.
Empty tables at the market in Santiago de Compostela in Galicia, which has shut down food and drink establishments.Lavandeira jr (EFE)
Antonio Maqueda

Spain’s economy shrank 11% in 2020, according to data released on Friday by the National Statistics Institute (INE). This is the biggest contraction since the days of the Spanish Civil War in the late 1930s.

This dismal figure is a result of the restrictions imposed last year to curb the spread of the coronavirus, particularly the 94 days of strict home confinement that nearly brought the economy to a halt between March and June. Economic output fell 17.8% in the second quarter, and even though there was some recovery during the second half of the year, it was not enough to make up for the damage.

During the first six months of the year, government spending was practically the only engine of economic activity

Output grew by a historic 16.4% in the third quarter after the country emerged from lockdown, but the second and third waves of the pandemic reduced this growth to 0.4% in the last three months of the year, according to INE data.

This growth saved the economy from a full-blown recession, but while the most optimistic forecasts hold that Spain will be back at pre-pandemic levels in late 2022, most experts believe that the summer of 2023 is a more realistic date.

The Spanish government, led by a center-left coalition of the Socialist Party (PSOE) and Unidas Podemos, had estimated a GDP contraction of 11.2% in 2020, and it is now forecasting a 7.2% rebound in 2021 without factoring in the impact of European recovery funds.

If Spain is able to successfully manage and invest the nearly €30 billion in reconstruction aid pledged by Brussels for this year, the economy could grow by as much as 9.8%, according to the executive’s estimates.

Services and tourism

Maspalomas beach in Gran Canaria during the spring lockdown.
Maspalomas beach in Gran Canaria during the spring lockdown.Getty Images

Statistics clearly show that the brunt of the impact last year was felt by the services sector, particularly activities related to hospitality. Mobility restrictions ravaged the tourism industry, which is normally a driver of economic growth that accounts for nearly 14% of GDP. International arrivals sank from a record 85 million in 2019 to 20 million in 2020, leading to business closures across the spectrum of the tourism sector, from hotels to bars, restaurants and retail stores that made a living from sales to visitors.

This in turn had an impact on the job market, especially in regions that are highly dependent on tourism such as the Balearic Islands and the Canary Islands, where unemployment rose above the national average.

The effects of the tourism collapse were compounded by a slowdown in exports, and by a drop in domestic demand fueled by uncertainty about the future as many workers were laid off or furloughed.

Public spending

During the first six months of the year, government spending was practically the only engine of economic activity. Public spending reached historical highs as the executive sought to address the health and economic crises, and this effort will be reflected in higher public debt and deficit levels.

Mirroring similar action across Europe, the Spanish government launched a stimulus plan in March to protect households and businesses. A leading measure was the ERTE job retention scheme, which helped companies reduce costs while avoiding layoffs.

The move has kept Spain’s jobless rate for 2020 at 16.1%, as furloughed workers are not counted as unemployed. The scheme has just been extended for a fourth time until May 31. The government also introduced aid programs for businesses, including access to state-backed loans through the state-owned bank ICO.

All of these measures have helped cushion the tremendous blow delivered by the coronavirus crisis, but they have not prevented 2020 from being the worst year for the Spanish economy since the end of the Civil War in 1939.

English version by Susana Urra.

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