Spain: A sharp contraction in the first quarter, but the worst is yet to come
The first estimate of GDP in the first quarter showed that growth contracted by -5.2%, but the second quarter is likely to be worse. On top of that, there's political stress
The economic growth figure in the first quarter was the worst since the series began in 1970. Consumption and investment contracted by 7.5% and 5.8%, respectively. Both export and import growth contracted by 8.4%.
The lockdown measures enacted on 14 March unsurprisingly had the largest impact on the Arts, entertainment and other services sector (-11.2%), the Trade, transport and accommodation and restaurants sector (-10.9%) and the Construction sector (-8.1%).
These figures, however, are a first estimate of what happened in the first quarter of 2020 and based on partial information. In normal times, assumptions to produce a first estimate are quite accurate, but in these unprecedented times they are probably not. It is possible, and in fact likely, that the growth figure will be revised.
Political tensions
As the spread of Covid-19 is coming under control, the lockdown is slowly being phased out. Since Monday 4 April, for example, non-essential shops have been allowed to open by appointment and restaurants can offer takeaway food. Pedro Sánchez, Spain’s prime minister, announced that shifting to a more normal situation would have four stages and in the best case would be completed by the end of June. It would, however, vary province by province. Schools, in contrast, would not reopen until September.
But there might be a problem. The state of alert, the legal regime that makes lockdown measures possible, expires this Sunday, while Pablo Casado, the leader of the centre right People’s Party, said he would not support a two week extension. Casado argues that the government should use legislation, and the special legal regime of the state of alert, to control the spread and the economic impact. This Wednesday, the parliament will vote on the matter.
Looking ahead
Meanwhile, the first figures for the second quarter are rolling in. And as expected the economic situation has got worse. The PMI for the manufacturing sector for April dropped to 30.8 compared to 45.7 in March. The sub-indices looking at production, new orders and exports registered the sharpest drop ever recorded since data were first collected in February 1998. The survey also points to strong deflationary pressures. Input costs dropped mainly due to lower prices for metals and oil-related products.
Another figure that illustrates the economic impact in April is the number of car registrations. They already fell sharply in March and in April they nearly came to a standstill. There were 96.5% fewer car registrations in April compared to a year ago.
Conclusion
As the second quarter will be much more affected by the lockdown measures compared to the first, we expect that the growth rate will be much more negative in the second quarter. As the lockdown measures will only be gradually phased out, and over a relatively long period, we expect that growth will remain weak. On top of that, Spain’s large tourism sector will not recover quickly. All this implies that the recovery in the second half of the year will be slow. Given this situation, we downgrade our growth forecast for 2020 to -9.5%.
"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).