Perspectives

Badly hit by the Covid-19

EcoPerspectives // 2nd quarter 2020  
16  
economic-research.bnpparibas.com  
Spain  
Badly hit by the Covid-19  
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.  
1
- GDP Growth and inflation  
Spain has been heavily hit by the Covid-19 epidemic. At the end of  
March, the country had the second highest number of reported  
cases in Europe, after Italy. Prime Minister Pedro Sanchez has  
announced a substantial fiscal package. EUR 200 bn (16.6% of  
(Y/Y, %)  
GDP Growth  
Forecast  
Inflation  
8
6
4
Forecast  
6.7  
1
current GDP ) will be provided primarily via bank guarantees and  
2
deferred social security contributions for companies.  
A
postponement in loan repayments has also been introduced for the  
most vulnerable households. The Spanish economy should contract  
by at least 3.3% in 2020 before a recovery in 2021. GDP growth  
was strong in 2019 (+2.0%), although both the economy and the  
labour market began to lose steam in the summer of last year.  
2.4  
2
1.7  
2
0
2
4
1.3  
0.7  
-
0.2  
-
-
-
3.3  
Spain: particularly vulnerable to the Covid-19 shock...  
2018  
2019  
2020  
2021  
2018  
2019  
2020  
2021  
Source: BNP Paribas Global Markets  
The structure of the Spanish economy renders the country  
particularly fragile against the coronavirus shock. First, the Spanish  
economy is composed largely of SMEs, whose cash positions are  
by nature less robust than major companies. Nearly one-third  
... but debt levels are lower than in 2009-2011  
Nevertheless, it is worth noting that the coronavirus crisis has  
emerged at a time when the government’s fiscal position had  
improved significantly. Indeed, the government deficit has shrunk  
considerably since Spain came out of recession in 2013: the  
(
32.1%) of gross value added in the non-financial sector is  
generated by companies with fewer than 20 employees. This is well  
above the EU27 average of 27.2%.3  
5
Spanish primary balance recorded then a deficit of 3.6% of GDP.  
Furthermore, the Spanish economy has a strong focus on the  
service sector. This sector consists in large part of businesses that  
are considered as ‘non-essential’ (tourism, leisure) and which are  
currently closed down. On this metric, Spain ranks highly within the  
The public accounts for 2019  published on 31 March  showed a  
primary deficit of 0.36% of GDP, a slight increase on the 0.10% of  
GDP in 2018. Spain’s structural primary balance is estimated at a  
deficit of 0.8% of GDP in 2019. Thus before the announcement of  
its emergency plan, the government had some fiscal leeway to  
6
EU: its service sector accounts for 74.2% of total value added,  
compared with an EU average of 73.0%.4  
cushionthe slump in economic activity.  
Lastly, Spain continues to face mass unemployment. Although the  
jobless rate has fallen significantly since its peak of 26.1% in Q2  
The Spanish economy was also in a less ‘perilous’ financial position  
than during the 2008 financial crisis or during the European  
sovereign debt crisis in 2011. Although the ratio of total debt to GDP  
remains high, it has fallen by nearly 30 points of GDP since the  
peak in Q3 2014, reaching 267.3% in Q3 2019. Private sector debt  
2013, it was still 13.6% in February. Even if economic activity  
restarts in the second half of 2020, job offers will, in all likelihood,  
take much longer to recover as companies needs to first ensure  
their financial viability before recruiting. Long-term unemployment –  
which has a much greater impact on individuals than short-term  
unemployment could thus increase sharply.  
(
non-financial companies and households combined) was at its  
lowest since Q3 2004 (Figure 2). Part of the fall in private debt has,  
however, been transferred to the public sector. Government debt  
stood at 97.9% of GDP in Q3 2019.7  
1
Based on 2018 GDP.  
EUR117 billion will be provided by the government and EUR83 billion by  
2
5
the private sector, primarily the banks. The plan, announced on 24 March,  
stipulates that the government will guarantee 80% of bank loans taken out  
by SMEs and the self-employed. This guarantee is reduced to 70% for  
companies with more than 50 employees.  
The primary balance excludes debt interest payments. INE data.  
The structural primary balance excludes the impact of the economic cycle,  
6
7Bank for International Settlements data.  
3
4
Eurostat figures for 2017  
Eurostat figures for 2017  
EcoPerspectives // 2nd quarter 2020  
17  
economic-research.bnpparibas.com  
Towards a return of public investment?  
2- Private debt  
Private non-financial sector debt (% of GDP)  
With government spending set to rise sharply in 2020, the role of  
government investment as a support for economic growth could  
come back at the top of the political agenda. Government  
investment in Spain has stalled in recent years, even after the  
recession ended in 2013. The share of public investment in GDP  
has thus fallen from a peak of 5.2% in 2009, to 2.0% in 2019 (Figure  
2
40  
220  
00  
180  
2
3
). This decline is the result of the fiscal consolidation pursued by  
160  
140  
120  
100  
the former government of Mariano Rajoy, which followed a period of  
over-investment, particularly in the real estate sector.  
Once the health crisis finishes, there will be legitimate questions to  
be asked about the pursuit of low public-sector investment. This is  
true in healthcare, where GFCF was 0.8% of GDP in 2017. More  
8
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019  
broadly, targeted public sector investment that supports innovation  
and boost productivity remains a significant driver of economic  
growth.  
Source: BIS  
3- Public investment  
GFCF (% of GDP)  
5
5
4
4
3
3
.50  
.00  
.50  
.00  
.50  
.00  
Political tensions have eased, for now  
The coronavirus crisis has eased the political divisions that have  
shaken Spain for several years. The government received quasi  
unanimously the congressional support to extend the state of  
emergency until 12 April. It is nevertheless worth noting that the  
coalition government secured some notable successes prior to the  
crisis: the initial budget for 2020 was approved by the Congress at  
the end of February (although the budget has of course been  
substantially revised since then). This budget included, amongst  
other things, a 5.5% increase in the monthly minimum wage  to  
EUR950  which follows a substantial 22% hike in 2019. The  
government objective is to raise the minimum wage to 60% of  
average wages by the end of the current parliamentary term in 2023.  
2.50  
2.00  
1.50  
1.00  
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019  
Source: Spanish Ministry of Finance  
Some political opponents (the Partido Popular), and indeed even  
the Bank of Spain , fear that the labour law reforms could ultimately  
have a negative impact on business competitiveness and hold back  
the country’s economic growth.  
However, once the crisis finishes, Prime Minister Pedro Sanchez  
will remain under pressure. The socialist party (PSOE) has 120  
seats in Congress. To maintain a congressional majority he will  
need to negotiate with the Catalan Separatist Party (ERC, 13 seats)  
and keep the unity with its coalition partner, Podemos, which has 35  
seats. Podemos urgently wants to revisit some labour law reforms  
introduced by the Rajoy government. In particular, Podemos wants  
to restore branch-level agreements and move away from intra-  
company agreements that have been preferred in recent years.  
Meanwhile, the ERC is asking a referendum on Catalonia  
independence and amnesties for a number of separatist leaders.  
9
8
This figure is above the OECD average of 0.5%, but below those of other  
9
European nations such as Germany (1.1%), Belgium (0.9%) and the  
Netherlands (0.9%). OECD data.  
Spain’s central bank urges government to stick with labour reform,  
Financial Times, 4 February 2020.  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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