OECD warns of no return to pre-crisis economy for Spain before 2023

The year 2021, and to a lesser extent 2022, will be times of recovery for the Spanish economy, but the bounce-back will not be nearly strong enough to make up for the steep decline caused by the coronavirus crisis.

In Spain, not even the rollout of a vaccine and two years of uninterrupted growth – expected to be 5% in 2020 and 4% in 2021 – will bring output back to pre-crisis levels any time soon. As a matter of fact, it will take a vigorous 2023 just to get the economy back to that point, according to the Organization for Economic Cooperation and Development (OECD), which has just released its December 2020 Economic Outlook.

According to this report, by the end of 2022 Spain’s gross domestic product (GDP) will still be 3.5% below what it was on December 31, 2019. In a country that has experienced some of the worst coronavirus outbreaks and endured one of the world’s strictest lockdowns, the year 2020 will go down in contemporary history as the worst on record in times of peace.

The increase in economic activity will only partially reverse the rise in the unemployment rate

OECD December 2020 Economic Outlook

Economic activity is expected to shrink by 11.6% this year, five tenths of a percentage point more than what the OECD was projecting in June, before the second coronavirus wave hit. Still, it is less than the 14.4% contraction that the international organization had expected at one point.

Even so, Spain will experience the second biggest decline of all G20 countries – a club that it is not formally a member of, although it is a regular guest at its summits. Argentina is expected to close the year with a 12.9% contraction, followed by Spain (-11.6%) and the United Kingdom (-11.2%). The average contraction for the G20 group this year will be 3.8%, according to the OECD projections.

Following the steep decline of 2020, Spain’s economy will not experience a classic V-shaped recovery, but will instead grow more slowly than many of its European neighbors: Germany is expected to return to pre-crisis levels in late 2022; France will do so in the first quarter of 2023; only the UK will be worse off than Spain, ending 2022 four percentage points before its pre-pandemic GDP level.

Elsewhere in the world, the United States will take a little over a year to bounce back, while China – the great global exception – is projected to end 2022 with GDP growth of 15% compared with late 2019. The global econoomy is expected to return to pre-crisis GDP levels in late 2021.

Spain: “a gradual and incomplete recovery”

In Spain, the recovery will be “gradual and incomplete,” according to the OECD report. In line with other national and international agencies, its experts are projecting that “the strong rebound in the third quarter of 2020 is set to be followed by contraction in the fourth quarter.” The report notes that Spain is still experiencing restrictions affecting the hospitality sector and retail across several regions. Analysts also expect that “the increase in private consumption will be limited by the incomplete recovery of the labor market and high precautionary saving.”

The Paris-based organization estimates that Spanish households’ saving ratio as a percentage of disposable income will remain at unusually high levels in 2021 (9.8%) and 2022 (6.3%) after hitting a record 14.2% this year. Unblocking those reserves to convert them into investment or consumption will be one of the keys to growth.

“While business investment will pick up, supported by low interest rates and declining uncertainty, still low capacity utilization combined with weakened financial positions of firms will limit the extent of the recovery,” says the section about Spain. Faced with these limitations, “the increase in economic activity will only partially reverse the rise in the unemployment rate.”

The OECD also notes that the pace of exit from the ERTE job retention scheme has slowed down in late 2020, and it asks the Spanish government to increase training programs for workers who remain on ERTEs “to improve their prospect of finding a new job in expanding sectors and firms.”

Despite all the problems, reality has proven to be less dire than what the most pessimistic outlooks were forecasting, including the OECD’s own spring report. Back then, its analysts had expected that a second coronavirus wave would result in unemployment of 25% (it is 15.8%, although largely thanks to the job retention schemes); household consumption decined 14% instead of 17%, and public debt now stands at 117% of GDP rather than the expected 130%.

English version by Susana Urra.