Perspectives

Fiscal compromises are inevitable

Eco Perspectives // 4th quarter 2020 (completed on 30 September 2020)  
economic-research.bnpparibas.com  
1
6
SPAIN  
FISCAL COMPROMISES ARE INEVITABLE  
The Spanish economy registered a record contraction of 22.7% in the first half of 2020. With the public deficit li-  
kely to rise above 10% of GDP this year, the government faces some difficult decisions, notably on the terms and  
conditions of its temporary layoff scheme (ERTE). The recovery in industrial production since the easing in lockdown  
restrictions in May is encouraging. However, this only partially compensate for the slow pick-up in activity in other  
sectors. The final quarter of 2020 will be a pivotal moment. A substantial programme of support for employment and  
investment (under the recovery package announced this autumn) is needed, while narrowing down support more  
specifically towards the sectors lastingly affected by the crisis.  
Spain has been Eurozone’s hardest hit economy by the Covid-19 crisis.  
Real GDP plunged by 18.5% in the second quarter of 2020. There  
were significant declines in all components of demand (consumption,  
investment and exports). We now expect GDP to shrink by 13.0% in  
GROWTH AND INFLATION (%)  
GDP Growth  
Forecast  
Inflation  
2
020, before growing by 5.0% in 2021.  
Forecast  
1
0
5
0
Local lockdowns have been introduced in several areas – and in  
particular in Madrid – in an attempt to halt a surge in new cases in  
the country. The worsening situation could hold back the economic  
recovery over the coming months, although the current situation is, for  
now, not as bad as in February-March. The Purchasing Managers index  
5
.0  
2
.4  
2
.0  
1.7  
0.6  
-0.3  
-0.3  
(
PMI) slipped back into contractionary territory in August (composite  
-5  
10  
15  
index of 48.4).  
-
-
INDUSTRY ‘DRIVING’ THE RECOVERY  
-13.0  
2020  
2018  
2019  
2021  
2018  
2019  
2020  
2021  
Nevertheless, the industrial sector has turned higher over the  
summer, led by a rebound in consumer goods and more particularly  
durable goods. In July, car sales climbed back above their level at  
the start of the year, before dipping in August. The introduction of the  
government’s Renove 2020 scheme – a programme offering subsidies  
for the purchase of cleaner vehicles – has stimulated demand. By July,  
industrial production was only 3.5% below its pre-crisis levels.  
CHART 1  
SOURCE: BNP PARIBAS GLOBAL MARKETS  
PMI INDEX AND EMPLOYMENT  
Employment*, annual change  
PMI composite employment (RHS)  
60  
This recovery in consumer goods has occurred elsewhere in Europe  
1 200  
(
France and Italy for example). This resulted in a stronger demand  
5
5
for Spanish exporters. The trade balance improved significantly as a  
result, posting a surplus in June (EUR 746.9 million), for the first time  
700  
200  
50  
1
since the current data series began . However, this increase only par-  
45  
tially compensate for the loss in revenue from tourism activity, which  
caused a sharp deterioration in the balance on services. The current  
account thus deteriorated this summer.  
-300  
40  
3
5
0
-
800  
The Spanish economy remains more structurally exposed to the  
current crisis than its European neighbours, as it is more dependent  
on non-tradable services (retail, construction, hotels and restaurants)  
3
-
-
1 300  
1 800  
25  
20  
2
* Number of workers affiliated to social security  
and SMEs . These activities have been hit harder by public health  
restrictions and the fall in tourism. The latter struggled to recover over  
the summer. In July, the hotel occupancy rate was 35.6%, half of July’s  
0
1 02 03 04 05 05 06 07 08 08 09 10 11 11 12 13 14 14 15 16 17 17 18 19 20  
2
019 level (71.7%).  
CHART 2  
SOURCE: MARKIT, BNP PARIBAS  
It is still too early to assess the full impact of the crisis on the  
labour market. The unemployment rate climbed to 15.8% in July and  
Young workers have been heavily impacted by the crisis, due to the  
more precarious nature of their employment status (short-term,  
seasonal, temporary work). The jobless rate for the 15–24 age group  
has increased by more than 10 points this year, reaching 41.7% in July.  
Youth unemployment remains nearly fifteen points below its 2013  
3
employment in August remained 3.5% below February’s level . However,  
we have seen a gradual, albeit modest, pick up in employment growth  
since the easing in lockdown restrictions in May. The PMI data suggest  
that the recovery in employment will continue in the coming months  
(
see Chart 2). This trend is of course fragile and dependent on the  
4
peak . Nevertheless, the reincorporation of this category into the  
evolution of the epidemic over the coming weeks and months.  
labour market will remain a key challenge for the Spanish authorities  
going forward.  
1
2
3
4
January 1985 Seasonally-adjusted data  
For more details, please see BNP Paribas EcoFlash Euro zone: Four countries, four ways to recover, 20 May 2020.  
Spanish employment agency (SEPE). More precisely, this figure represents the number of workers affiliated with the social security system.  
55.9% in July 2013  
The bank  
for a changing  
world  
Eco Perspectives // 4th quarter 2020 (completed on 30 September 2020)  
economic-research.bnpparibas.com  
1
7
A FISCAL PUZZLE  
CHANGE IN CPI  
The Spanish government must find the right balance over the  
recalibration of its temporary layoff scheme (ERTE). The current  
scheme, which is due to expire on 30 September, will be extended,  
but it is likely to become more selective and further limited to the  
sectors the most heavily impacted by health restrictions or those  
facing a longer recovery period (aeronautics, automotive industries).  
In return, the Labour Ministry has extended the tightening of  
redundancy conditions to 2021, which operates mainly via an increase  
in redundancy payments. According to the Ministry, there were 813,000  
employees under the ERTE scheme at the end of August, down from  
around 3.4 million during the peak in May.  
Contribution  
to annual  
Contribution to  
% change 6-  
months  
Annual  
Weight in CPI  
% change  
6-months  
CPI (August 2020)  
growth rate  
growth rate  
Total CPI  
100.0  
-0.52  
-0.52  
0.34  
0.43  
-0.79  
-0.13  
0.81  
-0.79  
-0.11  
0.16  
Core CPI (excluding fresh foods & energy)  
Food & non-alcoholic beverages  
Alcoholic beverages & tobacco  
Clothing & footwear  
Housing, water, electricity, gas & fuel  
Furniture & household equipment  
Health  
80.5  
19.5  
0.43  
2.20  
2.9  
0.50  
0.01  
0.23  
0.01  
6.5  
13.4  
5.8  
1.04  
-2.74  
0.44  
0.06  
-0.37  
0.02  
0.46  
-0.95  
0.39  
0.03  
-0.12  
0.02  
These adjustments to employment support measures come against  
a difficult backdrop in public finances. In its September forecast, the  
Bank of Spain estimates that the budget deficit will widen between  
3.9  
0.50  
0.02  
0.37  
0.01  
Transport  
15.4  
3.8  
8.4  
-4.40  
-1.22  
-2.06  
-0.71  
-0.05  
-0.17  
-4.45  
-0.57  
-1.92  
-0.72  
-0.02  
-0.15  
1
0.8% and 12.1% of GDP in 2020 depending on the scenario conside-  
Communication  
Recreation & culture  
5
red . Under both scenarios the debt-to-GDP ratio will climb by more  
than 20 points (to between 116.8% and 120.6%).  
Education  
1.6  
0.82  
0.01  
0.39  
0.01  
However, the funds allocated to Spain under the European Recovery  
Plan (Next Generation EU) should allow Pedro Sanchez’s government  
to introduce a substantial recovery package. Under the 21 July  
agreement, Spain will receive EUR 72.7 billion, or 5.8% of its GDP, in  
subsidies spread over the period from 2021 to 2026.  
Restaurants & hotels  
Other goods & services  
12.1  
6.8  
0.47  
1.51  
0.06  
0.10  
-0.59  
0.70  
-0.07  
0.05  
TABLE  
SOURCE: INE, BNP PARIBAS  
The national recovery plan must be approved by the European  
Commission in order for these funds to be released. The government  
has already unveiled a major investment programme in the digital  
sector – España 2025. This programme, run jointly by the public and  
private sectors, will last through to 2025 and will be worth a total  
of EUR 140 billion, EUR 70 billion of which will be allocated between  
2020 and 2023. After the emergency measures taken this summer  
–particularly to support the automotive and tourism sectors– the  
government will, in the coming months, set an agenda that focuses  
more on competitiveness and the transformation of the Spanish  
economy.  
TOWARDS SERVICES DEFLATION?  
The fall in economic activity during the first half of 2020 is causing  
downward pressures on consumer prices. The consumer price index  
(
(
CPI) dipped 0.52% year-on-year (y/y) in August. The underlying CPI  
excluding energy and perishable food) rose by only 0.43% y/y in  
August, its lowest annual increase since April 2015. This was partly  
due to lower services prices, a sector that is suffering more from the  
restrictions measures. The fall in the services CPI (excluding rents)  
over the past six months has been the biggest since the current data  
series began in January 2002. The last six months have seen major falls  
in the leisure, restaurant and hotel sectors, which follow price declines  
in transport, gas and electricity (Table 1).  
This downward pressure on prices is also visible in the real estate  
6
market. Despite historically-low interest rates , property prices fell by  
7
2
.3% between May and August (TINSA index) . That said, inflation could  
pick up in 2021, as the effect of falling energy prices at the beginning  
of this year recedes.  
5
6
7
https://www.bde.es/bde/en/secciones/informes/boletines/relac/Boletin_Economic/Informes_de_proy/  
According to the Bank of Spain, the average mortgage rate was 1.92% in July.  
The average price per square meter of land fell by 15.2% y/y in Q2. See El precio del suelo urbano se hunde un 15% y cae por debajo de los minimos de 2013, El Economis-  
ta, 16 September 2020.  
The bank  
for a changing  
world  
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.
Ce site présente leurs analyses.
Le site contient 2682 articles et 705 vidéos