The Spanish Economy: Pandemic leaves deep scars

In the past years, Spain has been in a difficult economic situation. The pandemic made the economic and social problems even worse. The pandemic leaves deep scars on the Spanish economy. Despite various remaining problems, there is hope for new dynamism. However, I am not too optimistic as to the long-term growth perspectives of the Spanish economy. After an economic contraction of almost 11 percent in 2020, I expect an economic expansion of around 6 percent in 2021 followed by a growth rate of around 7 percent in 2022.

The coronavirus pandemic caused a health crisis and a severe recession in Spain. Many people died from the virus. Gross domestic product dropped by 10.8 percent in 2020 and the situation on the labor market is difficult.

In spring 2020, Spain was severely hit by the Covid-19 pandemic and imposed a strict lockdown. As elsewhere, travel, tourism, hospitality, entertainment and many other sectors of the economy were hard hit. As expected, a fast recovery started during the spring of 2020. However, a fast increase in Covid-19 cases in the fall of 2020 again led to various strict measures to contain the pandemic during the winter. Many of these measures have been gradually removed in the course of the spring, but several measures remain in effect.

Several vaccines are now available and the beginning of the summer also helps bring infection rates down. However, it is not known at the moment whether virus mutations will make the situation worse again. For instance, some available vaccines might not be fully effective against these mutations.

After the Spanish economy had expanded by 17.1 percent in the third quarter of 2020 (after drops of 5.4 percent in the first quarter and 17.8 percent in the second quarter), output stagnated in the fourth quarter of 2020 and moderately contracted in the first quarter of 2021 (-0.5 percent). While private investment moderately increased by 1.0 percent, private consumption decreased 1.0 percent. There was a rise in public spending (+1.3 percent), which prevented a higher contraction of economic activity.

Since the start of the pandemic, my main worries have not been related to the short-term, but to developments in the medium- and long-term. There will probably be a solid recovery over the summer 2021. The rebound will be supported by an increase in tourism exports (more tourists will visit Spain). Currently, one can expect that a fair amount of (mostly vaccinated) tourists will visit the country, although the numbers seen before the pandemic will obviously not yet been achieved. In the fall and winter, the economic recovery will continue, but slow down.

Expansionary fiscal and monetary policies will support the gradual recovery of the economy and the labor market. But the situation will continue to be difficult for many people. Monetary policy of the European Central Bank will continue to be expansionary. In addition, Spain will receive considerable financial support from the recovery fund of the European Union. Many effects of the associated public expenditures will be relevant for the medium term, but there might also be some smaller short-run impacts, especially in 2022. The funds are planned to be used, among others, for infrastructure projects such as high-speed trains, “green” energy, and projects surrounding the “digital economy”. In the years to come, the further accumulation of public debt might be a burden and the government should aim at gradually achieving a balanced budget to bring the debt-to-GDP ratio down again in the medium term.

For the second quarter of 2021, I expect a relatively modest economic growth rate, which will be followed by a stronger expansion in the third quarter. The recovery will then continue in the fall and the winter but slow down to around 1 percent per quarter. For the whole year 2021, I see an economic expansion of around 6 percent followed by a growth rate of around 7 percent in 2022. Inflation will gradually increase towards two percent (the target of the ECB). The situation on the labor market will also improve, but remain difficult for many people. Obviously, such forecasts are associated with a high degree of uncertainty.

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