Brussels raises Spain’s growth forecast but warns of wave of insolvencies

After experiencing the greatest economic contraction in the European Union, Spain is set to make its biggest comeback.

The European Commission on Thursday released its Winter 2021 Forecast, raising Spain’s gross domestic product (GDP) growth prospects for this year to 5.6%, three-tenths of a point higher than previously expected.

Because the recession in 2020 was not as deep as expected, and thanks to the breakthroughs regarding vaccines, we now project the EU economy will return to its pre-crisis GDP level already in 2022

EU Economy Commissioner Paolo Gentiloni

For 2022, the EU executive is forecasting GDP growth of 5.3%, up from the previous figure of 4.8%. These numbers put Spain in the lead for economic growth in Europe.

Even so, Brussels believes that by late 2022 Spain still won’t have recovered its pre-pandemic GDP levels. It also warned the country faces a surge in corporate insolvencies as government support measures are phased out.

The European Commission’s forecast falls below the Spanish government’s own estimate of 7.2% growth, although Brussels notes that it did not take into account the impact of the European recovery fund, which will offer Spain as much as €140 billion in grants and loans. Madrid estimates that this financial boost will add 2.1% to the growth rate.

Cautious optimism

Brussels’ report denotes a certain amount of optimism – with many caveats – after Germany and Spain ended 2020 in a better position than expected.

“While the outlook for the near term looks weaker than expected last autumn, growth in the European economy is set to resume this spring and gather momentum in the summer, as progress in vaccinations allows for a gradual unfreezing of economic activity,” reads the report, even as it warns about the possibility of a resurgence of infections that would delay recovery once more.

The Commission said that GDP growth in the EU will be 3.7% in 2021 and 3.9% in 2022. For the euro zone, it is forecasting the same growth rate of 3.8% in both years.

“Because the recession in 2020 was not as deep as expected, and thanks to the breakthroughs regarding vaccines, we now project the EU economy will return to its pre-crisis GDP level already in 2022,” said Economy Commissioner Paolo Gentiloni at the news conference to present the forecast.

Tourism: a slow recovery

The report notes, however, that recovery will not be the same across countries. “The recovery is set to be uneven across member states. This mainly reflects differences in the structure of each economy and the relative importance of tourism and leisure activities,” said Gentiloni. This is the case in Spain, where tourism is a main contributor to GDP. The sector has keenly felt the impact of the coronavirus crisis, which reduced visitor numbers to a trickle last year.

The report talks about a “soft recovery” of tourism in Spain this year, while “in 2022, the tourism recovery is expected to gain momentum, with most impediments to activity fully lifted.”

Exports, investment and domestic demand are also expected to pick up again as restrictions are progressively lifted. But the study warns about the risk of a surge in company insolvencies as policy support measures are also removed, “mainly concentrated in those sectors most affected by activity restrictions.”

English version by Susana Urra.