Bank of Spain forecasts fall in GDP of up to 15.1% due to Covid-19 crisis

The central lender has charted several scenarios for recovery and has issued a warning that the Spanish economy will not return to pre-crisis levels until at least 2022

A worker cleaning the display window of a shoe store in Madrid.
A worker cleaning the display window of a shoe store in Madrid.Marta Fernández Jara (Europa Press)

The Bank of Spain is getting more specific about the impact that the coronavirus crisis is likely to have on the country’s economy.

A month and a half ago, with Spain paralyzed by one of the world’s strictest lockdowns, the central bank was projecting a slump of 6.6% to 13.6% of gross domestic product (GDP) for this year.

On Monday, the lender’s economists reduced this to between 9% and 11.6%, although they also contemplated the possibility of a more adverse scenario that would cause the economy to shrink 15.1% overall in 2020. What this means is that the Spanish economy could contract as much in a single year as during the entire Great Recession, when it shrank 9.5% over the course of six years.

Bank of Spain governor Pablo Hernández de Cos.
Bank of Spain governor Pablo Hernández de Cos. EFE

The projection is part of a series of alternative scenarios charted by the Spanish institution, which looked at the possibility of an early recovery, a gradual recovery, and a more adverse scenario fueled by new Covid-19 outbreaks.

In every alternative scenario, the economic impact is bigger in Spain than the eurozone average. There are several reasons for this: the confinement was longer and stricter than in other countries; the economy is heavily dependent on tourism; the business fabric is made up of many small and medium companies, which find it harder than large firms to survive a prolonged period of inactivity; seasonal hiring plays a large role in the job market; and the fiscal response has been a little more timid in Spain than elsewhere in Europe.

GDP growth

Next year, output is expected to make a “robust” rebound of 7.7% to 9.1%, although the Bank of Spain also considered a less optimistic option of 6.9% growth.

In the best-case scenario under consideration, complete recovery would take place in 2022, while the most pessimistic view pushes this moment to 2023 at the earliest.

“In the best of cases, the persistence of the crisis will be relatively high, and the V-shaped recovery will be rather asymmetrical,” said a source from the economy and statistics department at the central bank. “The fall is going to be very big, and it is quite likely that in 2022 we won’t even have gone back to pre-crisis levels. It’s going to take us some time.”

With Spain – just like other eurozone countries – implementing measures to support jobs and the economy, public debt is expected to soar to anywhere between 114% and 119% of GDP this year, then go slightly down to between 112% and 116% in 2021. It will be years before debt goes back to what it was at the close of 2019: 95%, a figure that seemed alarmingly high at the time.


On the labor front, the damage from the Covid-19 crisis will be intense, but unemployment will not be as bad as it was a decade ago, when nearly 25% of the labor force was out of a job. This is largely thanks to temporary layoff schemes known as ERTEs, which use state funds to cover the needs of workers who were furloughed during the lockdown.

In the “gradual recovery” scenario contemplated by the Bank of Spain, the jobless rate will rise to 19.6% this year, then ease down to 18.8% in 2021 and 17.4% in 2022.

If Spain instead enjoys an early recovery, unemployment will be 18.1% by late 2020, rise slightly to 18.4% in 2021 (when the ERTE scheme ends) and drop to 17.1% in 2022. And in a particularly adverse epidemiological situation, which the bank describes as a “very slow recovery” scenario, the jobless rate would soar to 23.6% this year.

By comparison, the jobless rate in late 2019 was 14.1%. But the Bank of Spain warns that the furloughing schemes are skewing the unemployment figures, and that “the jobless variable must be taken with a pinch of salt.”


The supervising institution also admits that its scenarios are built against a backdrop of great uncertainty, meaning that “we don’t see it very likely that GDP will evolve better than we have forecast, but we are not ruling out bigger drops.” Only new expansive fiscal measures, or the early adoption of a proposed European €750 billion recovery plan, could give GDP added momentum.

Until an effective medical treatment for the coronavirus is found, or a vaccine developed, the risk of new outbreaks remains a possibility. In such a negative scenario, “liquidity tensions could lead to solvency problems, with persistent negative effects on activity, greater business destruction, long-term unemployment and higher financing costs.”


Under pressure from the large falls in the price of oil and lower aggregate demand, inflation will enter negative numbers this year in every scenario considered by the Bank of Spain. It will then grow to around 1% starting in 2021, far from the eurozone target of around 2%. Governor Pablo Hernández de Cos last week justified the European Central Bank’s decision to increase its bond-buying program as the only way to avoid deflation.

“We are not considering a scenario with a general and persistent drop in prices, but if demand does not recover at the pace we forecast, we could see drops in prices,” said the bank’s economists.

English version by Susana Urra.

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