The Spanish Economy: Hard hit by the pandemic

The Covid-19 pandemic and the measures to contain it hit the Spanish economy very hard. After the first wave during the spring, a second wave hit Spain in the autumn of this year. As elsewhere, travel, tourism, hospitality, entertainment and many other sectors of the economy were strongly affected. In the first quarter of this year, gross domestic product (GDP) contracted by 5.2 percent. In the second quarter, GDP dropped by 17.8 percent (somewhat more than I expected in the summer). The economic recovery in Spain started during the summer, but has been interrupted by a strong increase in Covid-19 cases and measures to contain the pandemic. In the third quarter of 2020, GDP strongly rebounded at a rate of 16.7 percent. In particular, private consumption increased while private investment did not recover. Short-time work schemes probably helped stimulate private consumption. Perhaps it is useful to look at the decrease in GDP since the end of 2019: in the third quarter of this year, GDP was 9.1 percent lower than in the fourth quarter of 2019.

For the whole year of 2020, I expect a severe contraction of the economy of around 11 to 12 percent compared to the whole year of 2019. This will be followed by a recovery of perhaps 5 to 7 percent in 2021. In a more dramatic scenario, the recovery in 2020 would be slower and only amount to around 4 percent. Unemployment increased to 16.3 percent in the third quarter. It may rise further until the beginning of 2021. Hopefully, it will then start to gradually decrease but it will probably remain elevated in the next years. Inflation is low and currently, there are no clear signs that it would strongly increase in the next years. But of course, one should keep in mind that inflation can unexpectedly rise. The pandemic is a new economic situation and economists might not yet have adequately grasped all the economic consequences.

There are several risks. Especially, there is the risk of a long second wave of the pandemic that lasts during the whole winter. Hopefully, a vaccine and further improvements in the treatment of patients may gradually improve the situation next year. At the global scale, worldwide tensions could increase – especially between the United States and China. And at the European level, it is difficult to assess how Brexit will affect the Spanish economy in the short term.

While I use several models in my forecasts, my published numbers are also influenced by my experience and judgment.

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