The coronavirus pandemic has caused the Spanish economy to do a complete about-face. Despite the signs of a slowdown that were clear to see in the second half of 2019, Spain closed the year with solid growth of 2%, and the International Monetary Fund (IMF) was, until a few weeks ago, hopeful that the economy would follow the same rhythm in 2020, with an increase of 1.6%.
But everything has changed since the coronavirus crisis took hold, and in the blink of an eye Spain is suddenly set to experience a genuine crash as a result. The latest World Economic Outlook by the IMF predicts a fall in Spanish GDP of 8% and a sharp rise in the unemployment rate to 20.8%.
To put the projected contraction in perspective, it is useful to look at the global financial crisis of 2009, when the Spanish economy shrank by 3.6%. During the sovereign debt crisis of 2012, activity fell 2.9%.
Yet all of the forecasts, including those of the IMF, are mere estimates at a time of great uncertainty, evidencing that as well as a clear healthcare emergency, the coronavirus is also causing an economic tsunami of unknown proportions.
A historical drop
Not since the start of the Spanish Civil War, in 1936, has Spain seen a fall in GDP anywhere close to the drop that the IMF forecast on Tuesday. That year, the economy contracted 23.5% in a single year. Not even the 7.7% fall seen in 1945, during Spain’s inward-looking development model under Franco, known as autarky, quite reaches these predictions. According to Rafael Doménech, the head of economic analysis at Spanish lender BBVA, each week of additional confinement will cause an extra 0.8 percentage point fall in GDP.
In the context of Europe, the slump in the Spanish economy this year, according to the IMF, will only be comparable to that of Portugal, also 8%, and Latvia and Lithuania, both in excess of 8%. In Italy and Greece, the IMF predicts, the fall will be even greater: 9.1% and 10%, respectively.
Not since the start of the Civil War in 1936 has there been the kind of contraction forecast for 2020
The damage will be somewhat lower in the two main euro economies, however, with France to lose 7.2% and Germany 7%. The eurozone as a whole will lose 7.5%, but with very different intensities.
The Spanish executive noted that the IMF report includes Spain in its list of countries that have implemented “a swift and sizable” fiscal response to the crisis, as well as measures aimed at helping vulnerable groups such as tax deferrals, cash transfers and suspended enforcement of some debt contracts. The Fund also notes that Spain “has expanded eligibility for unemployment benefits and exempted impacted firms that maintain employment from social contributions.”
In a press release, the Spanish Economy Ministry said on Tuesday that “the IMF forecasts, in line with those of other organizations, point to an intense fall in activity in 2020 that is in line with the major confinement measures adopted by the Spanish government to stop the spread of the pandemic, and subsequently, a rebound in the fourth quarter with a significant recovery in 2021, thus confirming that we are talking about an intense crisis, but one with a limited duration.”
The recovery is expected to be relatively strong in 2021, with growth of 4.3% that will partially offset the lost ground due to current drops of 30% to 40% in consumption, according to estimates by private analysts. Italy is expected to grow 4.8%, Portugal 5%, Greece 5.1%), France 4.5% and Germany 5.2% next year.
The recovery is expected to be relatively strong in 2021, with growth of 4.3%
As usual in Spain at times of economic contraction, employment will take the biggest hit despite the government’s mitigation efforts, which include financial aid for struggling businesses and temporary layoff schemes to prevent full-blown firings.
The unemployment rate, which ended 2019 at 14% after falling for six straight years, is now expected to climb to nearly 21% this year. That would be the fourth time in modern Spanish democracy that the figure passes the 20% mark. Next year, the jobless rate is expected to fall back to 17.5%.
Although the IMF will not release its deficit outlook until Wednesday, indicators suggest there will be a sharp increase in the public debt-to-GDP ration of between 25 and 30 percentage points.
The international organization believes that Spain’s inflation will be pushed back into negative territory this year due to the slowdown in activity, while the current account balance (which measures a country’s exchange of goods, services and money with other countries) will improve, rising from 2% in 2019 to 2.2% in 2020 and 2.4% in 2021.
Although the Fund does not offer disaggregated data, historical experience suggests that there will be a sharp drop in imports due to the contraction of consumption, while exports will fare better. And the drop in oil prices “is going to help us a lot,” said the BBVA analyst Doménech, providing a small dose of good news about the worst economic period since the Spanish Civil War.