Spain in 2021: Many economic hurdles to recovery
Looking at the challenges for Spain in 2021, one could become dismayed. The health crisis was severe, and together with the specific characteristics of the Spanish economy, this has had a disproportionate effect on activity. We expect those same factors will lead to a slow recovery in 2021 and beyond
Spain's economic downturn in 2020 is likely to be the worst of all eurozone countries. Economic activity is currently still 9% lower compared to the pre-crisis level, while for the eurozone as a whole, the damage lies around 4%. The strict lockdown during the first wave, the second which came early, the reliance on tourism, a high share of small businesses in the service industry and, limited fiscal space all contribute to this.
Spain's economic downturn in 2020 is likely to be the worst of all eurozone countries
And many of the reasons why Spain was hit so hard will likely lead to a slow recovery in 2021 and beyond. It is unlikely that the tourism sector fully recovers in 2021. And the high share of small businesses in the service industry will lead to a sharp increase in bankruptcies and redundancies. Indeed, recent research from the ECB shows that one in seven (14%) Spanish workers are in non-financial companies at risk of bankruptcy, which is the largest share in the eurozone. Compared to pre-crisis levels, the unemployment rate already increased by 2.5 percentage points to 16.3% in the third quarter, and we expect it to rise to 17.5% in the course of 2021.
Given the high structural deficit and elevated government debt before the Covid-19 crisis, it was also more difficult for Spain to embark on large fiscal stimulus plans. Indeed, some politicians were afraid that the European Commission would toughen its position on the budget rules and that eventually, bond investors would punish Spain with higher borrowing costs. Research from Breugel, a think tank, shows indeed that current fiscal measures in Spain are limited compared to other hard-hit countries, such as France and Italy. We think the same issues will hold for 2021.
For further fiscal support, Spain is looking to Europe. First, it will be important that the European fiscal rules continue to be suspended. This is already the case for 2020 and 2021, but it will also be important for 2022 and probably longer. The European fiscal board, an advisory board to the commission, advised that fiscal rules should apply again when output is back to pre-pandemic levels. According to our current scenario, this will not happen before 2023. Second, Spain expects to receive €140bn in grants and loans from the Next Generation EU fund. This could give oxygen to public finances and the economy.
2020 is a year we all want to forget, but unfortunately, it will cast a long shadow. Given the depth of the recession in 2020 and some structural characteristics, the Spanish economy will need a lot of time to fully recover.
The Spanish economy in a nutshell
Download
Download article20 November 2020
The Eurozone in 2021 This bundle contains {bundle_entries}{/bundle_entries} articles"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.
This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.
The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.
Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.
ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).