Spanish economy showing signs of post-Covid recovery

There’s nothing more than a handful of figures. The horizon is still hazy. A recovery worthy of that name is still a long time off. But Spain is beginning to bounce back from the effects of 2020, including the biggest decline in output since the Spanish Civil War.

After a year to forget, several indicators reviewed by EL PAÍS suggest that the country’s economic engine is starting up again. The winter of discontent left behind by the pandemic is making way for clearer skies: the government has been seeing signs of recovery from mid-April, and the economy is expected to accelerate in the coming months – subject to the risks derived from the epidemiological situation. The fate of the economy now rests on summer, when the tourism season will enter full swing.

All pandemics leave a trail of nightmares in their wake, but history suggests that these are closely followed by interesting times. There are dizzying economic recoveries during which uncertainty evaporates and people start to spend again. There is creative destruction when businesses and sectors are able to identify new opportunities. And there is political risk: the “Spanish flu” was followed by the Roaring Twenties, and later by the rise of fascism, communism and other 20th-century demons. Right now Western economies have just entered the first phase: they are bouncing back from the dramatic effects of the pandemic and the Great Confinement. Spain is a bit late joining this wave, but it is getting there, judging by half a dozen indicators that reflect a change in the mood.

The first sign is in effective employment: the number of contributors to the Social Security system, after deducting workers on the ERTE job retention scheme and the self-employed on Covid-related benefits, fell consistently until February, then began growing in March and surged in April with nearly 70,000 new affiliations. In fact, the job market has been much more resilient this time around than in previous crises.

The second sign is an improvement in confidence indicators for both manufacturing and services: the Purchasing Managers’ Index (PMI), which assesses the prevailing direction of trends in these sectors, are at their highest level in two years.

Third, the economy is seeing a rise in consumption, as evidenced by higher credit card payment figures. And fourth, industry is taking off again, as shown by indicators focusing on industrial production and the consumption of energy and cement. A fifth element of hope is the fact that even the badly affected services sector is starting to come back to life, according to early estimates of hotel bookings.

Nearly all of these numbers could be summed up by a sixth element: the acceleration of the vaccination campaign and its impact on infections, deaths and hospital bed occupancy by Covid-19 patients.

“The recovery will begin in the second half of the year,” said Economy Minister Nadia Calviño on Monday. Her department has just reduced the 2021 growth forecast due to a first quarter in negative numbers, with a 0.5% drop in gross domestic product (GDP) caused by the third coronavirus wave and the containment measures that followed.

But vaccination is changing all that, and the second quarter of the year could end in the black. Data monitored by the Economy Ministry and the Bank of Spain show there were early signs of recovery in March that consolidated in April. “Things are getting better and the normal course of events would be for growth to accelerate gradually, always depending on the evolution of vaccines and barring any more trouble from the virus,” said Óscar Arce, the chief economist at the Bank of Spain. “The short-term risk used to be the pace of vaccination; now, with a view to the summer, the key lies in saving the tourism season; towards the end of the year, it will be important to implement the European funds.”

Economic forecasts are essentially organized mirages, and the pandemic has made forecasting a more precarious forward-looking enterprise than ever before. But Spanish economists are looking at other countries further along with their vaccination drives – places such as Israel, the United Kingdom and the United States – for signs of what to expect. And it is to be expected that once the uncertainty clears up, all the savings that have been held back by Spanish households (representing three GDP points) and by businesses (billions of euros) will be released, pushing up private consumption and investment on the back of improved expectations.

“Leading indicators are offering the first good news on the consumption side, and the normal thing would be to see accelerated GDP growth, ending the year at around 6%,” said Ángel Talavera of Oxford Economics. “There’s a feeling that we’ve left the worst behind. But there is still a lot of uncertainty, especially regarding the tourism season and markets like Britain. If that clears up, we could see a very positive surge in expectations, but the main thing are vaccines and infections.” Decisions in the main markets that send tourists to Spain will be made in the coming weeks. That means that Spain needs to keep the situation under control, as tourism contributes 12% to the economy.

There are two major differences between this crisis and the one that preceded it. The job market has held up much better thanks to measures such as the government’s ERTE job retention scheme. And Europe has not made the mistake of demanding austerity measures, as it did 10 years ago. But the road ahead is still a lot like the mountain stages of the Tour de France: “Brussels needs to make decisions on fiscal rules, and the European Central Bank needs to clarify what it will do from the spring onwards,” said Carlos Martínez Mongay, a former deputy director general of economic affairs at the European Commission.

“But Spain must minimize the political risks in order to send out the right signals to the economic players,” added Mongay. “Consensus is needed for reforms. And support for the government must be clarified in order to implement the [EU] recovery plan with guarantees.”

Spain’s minority government, made up of a leftist coalition of the Socialist Party (PSOE) and Unidas Podemos, managed to get the national budget approved a few months ago after years of extensions to the previous one. This made the executive believe that the rest of the political term would be a relatively placid affair. But successive infection waves and tremendous political noise soon put that notion to rest. A no-confidence motion in the southeastern region of Murcia set off a political domino effect that culminated in a resounding victory by the conservative Popular Party (PP) at an early election in the Madrid region last week.

Now, Prime Minister Pedro Sánchez of the PSOE is hoping for two years of strong economic recovery to take back the initiative, but analysts are not fully convinced. “The economy has started to bounce back, and that could generate trust. But the recovery has been delayed by the government’s passive attitude towards tourism and aid for businesses, in a scenario where tens of thousands of entrepreneurs could be forced to shut down,” said the analyst Juan Ignacio Crespo. “And GDP levels will not recover before late 2022 or 2023. I’m seeing a lot of doubt in the executive.”

English version by Susana Urra.