The Spanish data has sharply deteriorated – well below their historical averages – since the beginning of the lockdown in March. The trend in exports and industrial output remains positive on the graphic below but the latest figures are only for February. They will also plunge in March/April [...]
The number of unemployed people leapt by 311,037 in March (seasonally-adjusted figures), the biggest monthly increase on record. However, the unemployment report only included a fraction of people in partial unemployment (data for April should show a much bigger jump). The latest Government accounts (2019) show a substantial narrowing of the primary deficit since 2013. The improvement in public finances gives the government some leeway to face the current crisis.
Spain is Europe’s second hardest-hit country by the coronavirus pandemic, and is likely to suffer a sharp economic contraction this year. The economic impact remains hard to quantify. GDP is nonetheless likely to fall by more than 3% in 2020, before a recovery in 2021. The structure of the Spanish economy – turned heavily towards services and with a high proportion of SMEs – suggests that the economic shock could be greater than in other industrialised countries. Endemic unemployment could intensify, leaving a lasting mark on growth over the medium term. However, the improvement in public finances before the virus outbreak and a more stable political situation gives the government some leeway to face the crisis.
The weight of the tertiary sector in the Spanish economy has grown steadily over the years, and this growth has accelerated in the last five years. Value added for the services sector (volume terms) has increased by 16.2% since Q3 2008, the previous peak achieved before the financial crisis. Conversely, the industrial sector remains 6.9% below its 2008 level. This structural transformation could reflect the growing role of new technologies and the digital economy as engines of growth for both consumption and investment choices. This trend is reflected not only in Spanish domestic demand, but also in the country’s international trade. Indeed, Spanish exports of services have risen 46 % (volume terms) since the autumn of 2008.
Economic activity was solid in Q4 in Spain last year. Growth in Spain should nonetheless continue to slow in 2020.
Although Spanish growth remains solid, it is by no means sheltered from the European slowdown. In 2020, growth is expected to continue slowing to about 1.7%, after reaching 2% in 2019. The slowdown is also beginning to have an impact on the labour market. From a political perspective, Pedro Sanchez was the winner of November’s legislative election, although he failed to strengthen the Socialist party’s position. He was invested as a prime minister in early January by Parliament and he will lead a minority coalition government alongside the extreme left Podemos. The coalition will depend on the implicit support of some regional and nationalist parties, notably the pro-independence Catalan ERC party.
As the unemployment rate stabilises owing to the economic slowdown (14.1% in November 2019), the active population is finally rebounding. This is mainly due to the stabilisation of the number of young workers under the age of 30, after several years of decline. The chart shows that this decline had been strong since 2009. Such a decrease has been observed in the 30-40 years-old age group as from 2011-2012. For the latter group, the decline continues today. Conversely, the labour force over 40 and over 55 years old has never stopped growing, even during the years of crisis. These trends are mainly the results of changes in the participation of various age groups to the labour market
Spanish voters will be called back to the ballot box on 10 November, but there is no certainty that the election results will pull the country out of its current impasse. The political landscape is still too fragmented to produce a lasting coalition. The line to follow in the face of Catalan independentism only exacerbates the divisions and helps justify the lack of co-operation. Meanwhile, growth has slowed somewhat more sharply than originally expected, although it is still holding around 2%, a performance that would be welcomed by many of the other big European economies. The elaboration and adoption of the 2020 budget bill will have to wait until a new government is formed.
Spanish growth is still robust, but that does not mean it is totally immune to the European slowdown. Although growth is expected to slow this year, it should have no trouble holding above an average annual rate of 2%. After winning April’s legislative elections, Pedro Sanchez is still seeking a majority that would enable him to head the executive branch and form a new government. Spain officially exited the European excessive deficit procedure recently. Although a budget has not been formally adopted for 2019, the authorities are aiming for a primary surplus.
In a morose economic environment, Spanish growth stands out as one of the most resilient in the eurozone, and it seems to have entered the year at a very similar pace to the one in H2 2018. The main factors behind this resilience can be found on the household front, where the savings rate has dropped back to the low point of 2008. With only a few days to go before the 28 April general elections, the electoral landscape is still highly fragmented. Regardless of the outcome, the winning party will find it hard to form a sustainable majority coalition.
The current slowdown is in keeping with the European economic cycle. Prospects are still looking relatively good, and Spain’s expected growth rate is among the highest of the big eurozone countries. Unemployment is falling rapidly but it is still massive, especially long-term unemployment. Prime Minister Pedro Sanchez just presented his 2019 budget proposal to Parliament, but he is not sure it will pass. In any case, the deficit most likely slipped significantly below 3% of GDP in 2018, and Spain is preparing to exit the excessive deficit procedure that was launched 10 years ago.
Spain is a constitutional monarchy with a Prime Minister and a monarch. It is the fourth largest economy in the Eurozone.
On joining the euro, the country experienced a very strong, albeit largely unbalanced, period of economic expansion. Fuelled by the booming construction sector and surging house prices, funded by external debt. The 2008 financial crisis precipitated the burst of the housing bubble which in turn led to an economic and banking crisis.
Spain emerged from the 2008 financial crisis after a long and painful process to reform the labour market and rebalance the economy towards export-oriented sectors. Its banking sector has been restructured and recapitalised. Gains in cost-competitiveness have allowed Spain to increase its market share both inside and outside the Eurozone. The country experienced solid growth in years preceding the Covid-19 pandemic, averaging 2.6% (2015-2019).
Important structural weaknesses persist, and in particular the low of level of investment and productivity, which are among the lowest in Europe. This hinders the growth potential of the economy and limit the number of job creation in the long run. The slump in activity and the countercyclical policies put in place to deal with the coronavirus shock has caused a sharp increase in the public deficit.