The Spanish economy will be one of the hardest hit by the Covid-19 crisis.[1] The latest figures from the Spanish Employment Office (SEPE) confirm the sharp deterioration in the labour market: although the rate of decline in employment[2] eased in May, it was nevertheless 70,800 last month, taking the fall for the last three months to 1,119,000 jobs. Over the same period, unemployment has jumped 803,668, to 3,936,000, pushing the unemployment rate at around 17,1%[3]. The creation in urgency of a minimum living income, approved by decree on 29 May and introduced from June, is a direct response to the increase in unemployment and poverty that the country will face over the coming months.
However, it would be misleading to compare the current situation to the crises of 2008 and 2011. The systemic risks were, prior to the current health crisis, smaller than in these past downturns. Up until the end of last year, consumer and business indebtedness fell markedly, the government deficit had been reduced and the housing market had turned higher (up 2.1% y/y in Q4 2019, compared to a record fall of 10.0% y/y in Q4 2012). The Covid-19 crisis will break this positive cycle and the economic recession in 2020 will be sharp. However, the epidemic seems to recede rapidly in Europe and borders within the Schengen area are progressively reopening: this raises hopes of a stronger-than-expected economic recovery in the second half of 2020, particularly in the tourist industry, which is a key sector in Spain.
Technological transformation: Spain lagging behind?
Spain technology sector value addedIt would also be wrong to ignore the profound transformation occurring in the Spanish economy since the financial crisis of 2008. The economic weight of the ‘technology’ sector has increased, and particularly since 2013. This trend can be seen at different levels:
In terms of employment: the numbers of jobs in the information and communications sector and in “professional, scientific and technical services” increased by 21.7% (+90k) and 14.7% (+302.5k) respectively between Q1 2008 and Q1 2020. Conversely, total employment fell by 8.7% (-1,723k) over the same period. As a share of total employment, these two sectors accounted for a combined 15.7% in Q1 2020, compared with 12.3% in Q1 2008.
Technology sector share*, Q4 2019In terms of production: value added from these two sectors represented 13.3% of total value added, up from 10.6% in 2008.
In terms of investment: the share of investment in intellectual property products (patents, inventions) climbed from 2.55% of GDP in Q1 2008 to 3.56% in Q1 2020.[4]
The increase in the share of high value added sectors in the economy is happening across most developed countries. It reflects – to a large extent – the expansion of the digital economy, both in services (e-commerce, fintech, apps) and industry (production chain automation, industrial robots, connected objects).
However, Spain continues to lag behind other major European countries. Table 1 compares EU economies on these three measures (value added, employment and investment). Spain remains below the EU-28 average, and in particular behind France and Germany. Looking beyond Europe, Spain is also trailing the US and Japan.
The lag in cutting-edge investment explains partly why Spain has not generated sufficient new jobs to offset losses in more traditional sectors heavily impacted by these technological transformations (manufacturing, construction and even finance). Nissan’s announcement that the company will close its Barcelona plant – causing the loss of 2,800 jobs – is the latest example of the difficulties faced by the car industry vis-à-vis technological changes and increased competition from China in the electric-vehicle segment. The Covid-19 crisis has exacerbated these difficulties, but it is not the main cause, which is mainly structural.
Green investment: an opportunity to be seized
The Covid-19 crisis, major structural challenges (climate change, ageing population), and the large fiscal stimulus packages announced by governments and the EU, should increase the weight of technology sectors in all ‘developed’ economies over the coming years. Spain has key strengths to take advantage of this potential wave of investment:
In the renewable-energy sector: Spain benefits from a favourable landscape and climate for the development of renewable energy, in particular solar power. In 2019, Spain was Europe’s leader for onshore wind power.[5] The country also became the biggest recipient of solar power investment in Europe last year: installed capacity was 4.5GW, compared to 4GW in Germany and 0.9GW in France.[6] The Covid-19 crisis is expected cause to a slowdown, or even a drop in investment over the short term (2020-21).[7] However, Spain’s lead in this sector could represent a significant source of employment for the country. The solar power industry could generate 1.73 million jobs in Europe, which is equivalent to nearly half of the new jobs in the whole renewable energy sector for the region (between 3.3 and 3.4 million).[8]
Recent announcements by the Spanish Government have been encouraging: last month was presented a National Energy and Climate Plan, which sets an objective of carbon neutrality by 2050. This plan still needs to be approved by the parliament. If it goes forward, it would put a moratorium on any new fossil fuel project and would seek to achieve 100% renewable electricity by 2050. Government estimates suggest that this plan will require EUR 200 billion investments over the next 10 years and could generate 350,000 new jobs each year.
Fintech: Spain remains a major fintech centre in Europe. According to the Bank of Spain, the number of fintech firms in Spain (224) was close to the level in Germany (261) and the highest in Europe on a per capita basis.[9] The UK’s departure from the EU – the UK dominates by far the sector in Europe, with 1,171 fintech companies in 2019 – could lead to a reshuffle in Europe and allow Spain to attract more investment and create more jobs in this sector.
More broadly, Spain seems well placed in the digital economy sphere relatively to its main European partners. According to the European Commission’s Digital Economy and Society index (DESI), Spain ranks 11th in Europe in 2019, behind the Netherlands (3rd) and the UK (5th) but ahead of Germany (12th) and France (16th).[10] Spain performs well in the digitisation of public services (4th), but is lagging significantly in the level of digital education of its population (17th). Between 2014 and 2019, Spain’s DESI ranking increased from 13th to 11th
There are still many obstacles for Spain to take full advantage of these opportunities: the public deficit will widen sharply this year, further limiting the government’s fiscal leeway. The need to tackle higher unemployment could, in the short term, reduce investment in ‘high-tech’ sector and dampen the political will to follow an ambitious agenda in this area. The lack of digital education (as highlighted by the DESI index) will take time to be resolve and could limit the supply of labour needed to develop these new sectors.
On this point, the European Green Pact and the EU recovery package of EUR750 billion (EUR500 billion in grants and EUR250 billion in loans) could strongly support the Spanish economy. Under the current EU recovery package, Spain would benefit from EUR77.3 billion in grants, a sum equivalent to 6.2% of annual GDP[11].
The structural challenges facing the Spanish economy are not isolated cases. Germany (automotive and coal sectors), France (automotive and retail sectors), the US (oil and retail sectors) and China (metallurgy and coal sectors) are all facing similar challenges in transforming their economies. The question is not when, but at what pace Spain will conduct this transition, which is essential for the country in order to remain competitive as well as to create long-term and, overall, better-paid jobs.
