The Bank of Spain on Wednesday issued its projections for the Spanish economy to 2021, and warned that any government that comes out of the April 28 election should prepare the public accounts for a potential downturn.
Despite a global slowdown, particularly in the euro zone, the Spanish economy remains “notably dynamic,” said the supervisor in its quarterly report. While exports have lost steam, domestic demand has compensated this effect thanks to job creation, low inflation, a lower household savings ratio and higher pensions.
The year 2019 will be “a fallow year” for budget reduction
In its report, the central bank anticipates continued GDP growth but underscores that there is “a high degree of uncertainty regarding the future orientation of economic policy” in Spain, and notes that adverse global events such as persisting uncertainty over Brexit or the potential adoption of protectionist measures could also affect the GDP growth forecast.
Spanish GDP is projected to grow at a gradually slower rate of 2.2% this year, 1.9% in 2020 and 1.7% in 2021. The supervisor also predicts small reductions of the public deficit, which is expected to drop from 2.7% to 2.5% of GDP this year.
This is partly due to lower inflation, and partly to the so-called “Social Fridays,” alluding to the social measures that the Pedro Sánchez government has been approving by decree at the Friday Cabinet meetings. Sánchez, of the Socialist Party (PSOE), heads a minority government and he was forced to call a snap election after failing to secure parliamentary support for his 2019 budget plan.
Persisting uncertainty over Brexit or the potential adoption of protectionist measures could affect the growth forecast
“Taken individually, the measures do not entail large amounts [of money],” said Óscar Arce, head of the Bank of Spain’s studies department, at the presentation on Wednesday. But together, they make a dent in the public accounts.
Taking inflation into account, and despite higher tax revenues, this dent represents around €1.2 billion. “We don’t have a strategy on the table for public account consolidation that could help reduce this vulnerability,” said Arce.
In this context, fiscal policy would adopt a “clearly expansionary and pro-cyclical” approach, he added. This will make 2019 “a fallow year” for budget reduction, “which leaves us a little bit unsatisfied.”
As for the minimum wage hike announced by Sánchez in October, the Bank of Spain feels that it is too early to see an impact, but that figures from the first two months do not contradict the supervisor’s theory that 125,000 jobs will be lost. Arce said that salary improvements should ensure that competitiveness is preserved, especially in a scenario of increased risks to the economy.
Employment growth is projected to slow down, although job creation will reduce the unemployment rate to 12% by the end of 2021, down from around 14%.
English version by Susana Urra.