Friday, July 30

The Bank of Spain worsens the growth of 2021 to 6% due to the delay of European funds and vaccines


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Spain finished 2020 better than expected but it has also started 2021 with a worse footing than expected, which has once again upset the economic forecasts. This is stated by the Bank of Spain in its latest macroeconomic projections in which its growth forecast worsens from 6.8% to 6% for 2021 and predicts in its central hypothesis a GDP rebound of 5.3% in 2022 -1, 1 points more than in their predictions for December – and 1.7% in 2023 – unchanged.

The reason is that the recovery is postponed to the second half of the year, due to the third wave but also to the delay in European funds -which pass three tenths of growth from 2021 to 2022- and the vaccination campaign, which will make this year we will grow less and next year, something more. Whatever, pre-crisis GDP will not recover until the first months of 2023, in a central estimate that assumes the “Practically complete disappearance” of the restriction measures in the last months of 2021 by having immunized a large majority of the population.

As is the norm in pandemic times, the Bank of Spain draws three scenarios: a more severe one that assumes a resurgence and harsh restrictions, and a mild one in which improvement accelerates. In the first, growth would be 3.2% this year, that is, less than a third of the growth forecast by the Government this year, of 9.8%; to which would be added a rebound of 4.6% in 2022 and 2.2% in 2023. GDP would not regain its pre-pandemic height even at the end of 2023. In the soft scenario, growth would be 7.5% this year – close to the 7.2% forecast by the Executive without counting the impact of European funds -, 5.5% in 2022 and 1.6% in 2023. GDP would return to its pre-crisis level in early 2022.

17% unemployment this year

The Bank of Spain worsens its estimates for the labor market with greater intensity. The unemployment rate will be 17% this year –1.2 points more than in its projections for December–, 15.1% in 2022 –5 tenths more– and 14.1% in 2023 –2 tenths higher– , while in the severe scenario it reaches 18.3% in 2021 to drop to 17.2% in 2022 and 16.1% in 2023. Based on the mild scenario, the forecasts are 15.9% this year, 13.9% in 2022 and 12.8% in 2023. The Bank of Spain does not include the 900,000 employees who are currently in an ERTE among the unemployed and assumes that they will not be extended beyond what fixed – the Government approved an extension until May 31 -.

Anyway, for the start of the year the agency warns that Spain destroyed employment and activity in the first quarter: in its central scenario, it contemplates a 0.4% drop in quarter-on-quarter GDP that would reach 0.9% under the most pessimistic prism. Only in the soft scenario is there an increase of 0.4% in these first three months. But even in this last approach, the hours worked contracted by 1.6%, a cut that would be 2.4% and 2.9% in the following hypotheses. The most optimistic outlook was fulfilled in the fourth quarter, with growth of 0.4% as the Bank of Spain took for granted a contraction of 0.8%. The improvement in infections and the reduction of restrictions in December drove this reactivation. For the second quarter, the institution led by Pablo Hernández de Cos has not made forecasts, although it assumes that positive growth will be recorded.

Because the indicator that marks the behavior of the economy is health evolution and vaccination does not lead to promising prospects. «The vaccine production process is experiencing some delays that, if not exceeded, could lead to deviations with respect to the immunization schedule considered in the central scenario “, warns the agency.

Tourism, to the trantran

This will have an effect on tourism, the great engine of the Spanish economy. The center stage assumes that in 2021 40% of tourism exports will materialize of 2019, which will be higher than 80% in 2022 and almost close to 100% of pre-crisis sales in 2023. In the soft scenario, these projections are around 50% this year and 90% in 2022 but, in their hypothesis severe, would not reach 15% in 2021 being 60% in 2022 and 90% in 2023.

If extrapolated to summer, under the central projection the sector would not reach 60% of its pre-crisis level –Last year it was 20% – which in the mild scenario would be almost 80% and in the most negative scenario, it would not even reach 20% of last year.

European funds, more impact by 2022

The other variable that is lagging is European funds, whose impact will come more in 2022 than in 2021, according to the Bank of Spain. The improvement for 2022 is partially due to the fact that “part of the Next Generation EU funds that we thought would be spent this yearthey are more likely to be spent in 2022», Said the Director of Economics and Statistics, Óscar Arce. The institution predicts that 100% of the expenditure planned by the Government will materialize in 2021 but only 55% of the investment, which will be passed on to the following year, with the consequent impact on growth.

Although the Executive budgeted 27 billion to advance amounts if the resources were late in arriving, the problem is that the negotiations with Brussels are dragging on. “It is not so much the Brussels disbursements, but the finding that the process of requesting projects and reforms, the negotiations with Brussels and the validation will be more cumbersome than could be estimated“Arce clarified, who pointed out that the institution in December counted on” the Government being able to execute projects at the beginning of the year “, financing them on its own. “The impression is that this overtaking has not occurred, since we are still in the phase of compiling projects and negotiating with Brussels,” he reflected.

Business aid plan

The Bank of Spain considers that the upside risks come from the aid plan approved for companies a couple of weeks ago. The 5,000 million direct aid will increase the deficit, while the injection of capital (1,000 million) and the restructuring of loans (another 5,000) will result in an increase in public debt. This will worsen the deficit forecast in future revisions but it will also foreseeably improve the growth forecast.

The agency does not include this plan in its fiscal estimates, but predicts a deficit of 7.7% of GDP this year – after the end of 2020 at 10.5% -, being 4.8% in 2022 and 4.4% in 2023. The alternative scenarios show that in its severe scenario the imbalance would go to 9.1% this year, being 6.8% in its softest form. More worrying are the public debt figures. The Bank of Spain believes that it will continue to increase this year, with 117.9% of GDP in 2021 in its central scenario, to stagnate at 117.6% in 2023. In its most severe scenario, liabilities would go to 125, 5% in 2023 (122.6% in 2021), while in its mildest hypothesis it would close this year at 115.4% and drop to 112.8% in 2023.

Another event that may improve the Bank of Spain’s estimate is the fiscal stimulus plan approved by the president of the United States., Joe Biden, who can bring 0.6 points of additional growth to the Eurozone this year and 0.5 points a year the next two years. For Arce, both factors are offset by the abundant downside risks that may materialize in the future.

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