Perspectives

A fiscal stimulus monitored closely by Brussels

st  
Eco Perspectives // 1 quarter 2021  
economic-research.bnpparibas.com  
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7
SPAIN  
A FISCAL STIMULUS MONITORED CLOSELY BY BRUSSELS  
Forecasts made at the start of the year will probably turn out to be accurate. Spain is set to be the Eurozone’s  
economy hardest hit by the Covid-19 epidemic. We forecast GDP to shrink by 11.8% in 2020 before rebounding by  
7
.0% in 2021. The social situation has worsened again this year, forcing the government to introduce new large-scale  
welfare benefits (e.g. minimum living income), which will be reinforced in 2021. Spain’s huge EUR 140 billion stimulus  
plan will support the recovery, should raise the country’s potential growth and create jobs. But the structural budget  
deficit is widening. Once the Covid-19 crisis is over and the recovery underway, Brussels will intensify the pressure  
on the Government to speed up certain key reforms, and in particular regarding the country’s pension system.  
In all likelihood, the Spanish economy will contract again in the fourth  
GROWTH AND INFLATION (%)  
quarter of 2020. Although the second wave of Covid-19 has been  
receding rapidly since its peak in mid-November, restrictions on activity  
have remained – until mid-December at least – severe and among the  
most stringent in Europe. Despite the sizeable rebound in activity in Q3  
GDP Growth  
Inflation  
Forecast  
Forecast  
7
.0  
(
+16.7% q/q, non-annualised), Spanish GDP was still 9% below its end-  
019 level, a recovery comparatively smaller than in other European  
4
.9  
6
1
2
1
2.0  
countries. Breaking down the figures by expenditures, the recovery in  
service exports had unsurprisingly been the weakest (43.6% below the  
Q4 2019 level) – pulled down by the slump in tourism activity. Gross  
fixed capital formation and households spending were down 11.1% and  
0
.8  
0.9  
0
.4  
-
0.4  
-4  
-9  
14  
1
0.5%, respectively. However, within household consumption, spending  
on durable goods had rebounded rapidly, rising above its Q4 2019  
2
level.  
-
-11.8  
2020  
For sure, job-protection measures – mainly the ERTE temporary  
unemployment scheme – have significantly cushioned the shock on  
the labour market, particularly in the service sector. According to the  
2019  
2021  
2022  
2019  
2020  
2021  
2022  
3
Spanish Employment Office (SEPE) , the number of workers affiliated  
CHART 1  
SOURCE: BNP PARIBAS GLOBAL MARKETS  
to the social security system was 2.2% lower in November than in  
4
February in the industry, and 2.6% lower in services. Comparing these  
figures with the larger declines in GDP, we see that the government’s  
measures to protect jobs are having a positive effect, although this  
comes at a high cost for the public finances. According to the labour  
ministry, 746,900 workers were covered by a ERTE in November. The  
ERTE scheme has been extended until 31 January, which should limit  
the increase in unemployment until then. The unemployment rate was  
GOVERNMENT PRIMARY STRUCTURAL BALANCE (% GDP)  
3
2
1
0
1
6.2% in October.  
FISCAL CONSOLIDATION PUSHED BACK UNTIL 2022 AT -1  
-
-
-
2
3
4
THE EARLIEST  
Spain’s fiscal policy will therefore remain highly expansionary in 2021.  
The 2021 budget, which was approved by parliament in late November,  
will amount to a record of EUR239 billion. Key welfare measures put  
forward by coalition partner Podemos will be reinforced; this is the case  
of the minimum living income (IMV), for which a further EUR3 bn will  
be allocated (see box). However, investment accounts for the largest  
increase in the budget, with significantly greater spending on R&D,  
apprenticeships and vocational training, as well as the modernisation  
of public infrastructure. On the revenue side, new taxes on high-  
earners will be introduced. The budget will also be partly funded by  
EUR 27 billion of subsidies granted by the European Commission to  
Spain in 2021 as part of the EU recovery fund (Next Generation EU).  
-5  
-
6
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022  
CHART 2  
SOURCE: AMECO  
This record budget has been built in line with the rapid implementation  
of Spain’s large-scale EUR 140 billion national recovery plan (the  
Recovery, Transformation and Resilience plan”) for 2021-2026. With  
this plan, the government is hoping to generate around 800,000 jobs  
by 2023 and boost GDP growth by 2.5 percentage points over the same  
period, by investing massively in the ecological and digital transitions.  
Half of the spending (EUR 72 bn) is due to take place in the next three  
years.  
1
For a comparison of recovery rates, see H. Baudchon and L. Boisset, Eurozone: from  
rebound to relapse, BNP Paribas Ecoflash, 4 November 2020.  
2
A large part of the increase can be traced to automobile sales, which bounced back  
thanks to the government’s decision in June to offer subsidies for the purchase of cleaner  
vehicles (Renove 2020 programme).  
3
4
Seasonally-adjusted figures.  
Employment in the construction industry was only 1.1% lower than the February level.  
The bank  
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st  
Eco Perspectives // 1 quarter 2021  
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8
However, the public-sector deficit is expected to jump to around 120%  
of GDP at the end of 2020, an increase of 20 percentage points year-  
on-year. Against these circumstances, and once the Covid-19 crisis is  
over, Spain’s government will be under pressure from Brussels again  
to address certain major structural issues that represent a long-  
term drag on Spain’s budget balance. In particular, the European  
Commission wants the Spanish government to commit to ensuring the  
future viability of its pension system, and to introduce new measures to  
THE IMPACT OF COVID-19 ON INEQUALITY IN SPAIN  
Without doubt, rising inequality is one of the main social risks  
emerging from the Covid-19 crisis in Spain. In its annual report on  
1
wages development the International Labour Organization shows  
th  
that the ratio between wage earners belonging to the 9 -decile and  
st  
those belonging to the 1 -decile increased substantially in the first  
5
reduce the proportion of people with temporary jobs .  
wave of the pandemic, i.e. between Q1 and Q2 2020 (see chart 3).  
At the end of Q2, Spain’s ratio was by far the worst in the EU. Part  
of that sharp increase in disparities was due to the fact that a high  
proportion of jobs in Spain are precarious, in sectors hard-hit by  
Covid-19 restrictions and unsuited to remote working. To address  
these growing difficulties, the government introduced in emergency a  
minimum living income (IMV) in June. The IMV is a subsistence income  
of up to EUR 462 per month for a single person, rising to a maximum  
of EUR 1,015 for larger households. The IMV budget will be increased  
by EUR 3 bn in 2021, as recommended by the 2021 budget approved  
by parliament in November. A second significant welfare measure will  
be the 5% increase in the IPREM index used to calculate most welfare  
benefits. In addition, when the current government came to power it  
promised to raise progressively the minimum wage to 60% of Spain’s  
median wage by the end of the current parliament in 2023, i.e. to  
around EUR 1,200 per month. The minimum wage is currently EUR 950  
per month.  
Based on its November forecasts, the European Commission estimates  
that Spain’s structural primary deficit (i.e. the deficit excluding changes  
in income/expenditure related to the economic cycle and excluding  
interest payments on debt) will widen further in the next two years,  
reaching 5.2% of GDP in 2022 (see chart 2). This is by far the largest  
deficit in the Eurozone, and more than twice the Euro-area average  
(
-2.3%).  
NFCS AND THE COVID-19 SHOCK  
At this stage, it remains difficult to quantify precisely the impact of the  
Covid-19 crisis on the liquidity and solvency of the non-financial cor-  
6
poration (NFC) sector. A Bank of Spain study estimates that between  
April and December, demand for liquidity from non-financial corpo-  
rations could exceed EUR 230 billion, although almost three quarters  
of that would be covered by state-guaranteed loans. Unsurprisingly,  
the sectors struggling the most are tourism and leisure, transport and  
automotive. However, it is worth bearing in mind that non-financial  
corporations went into the Covid-19 crisis with a more solid financial  
position than in the past. In particular the debt-to-GDP ratio had drop-  
1 Global Wage Report 2020-21: Wages and minimum wages in the time of  
Covid-19, International Labour Organization, December 2020  
pe ae rd l ys t2e 0a 0d 0i lsy .7between 2010 and 2019, falling to levels unseen since the  
RATIO OF 90TH PERCENTILE OF THE WAGE DISTRIBUTION  
TH  
TO 10 PERCENTILE  
Completed on 7 December 2020  
40  
35  
30  
25  
20  
15  
10  
5
0
Q1 2020  
Q2 2020  
Guillaume Derrien  
guillaume.a.derrien@bnpparibas.com  
ESP  
AUT  
IRL  
CYP  
PRT  
ITA  
FRA  
NLD  
GRC  
BEL  
CHART 3  
SOURCE: : INTERNATIONAL LABOUR ORGANIZATION, BNP PARIBAS  
5
Bruselas apremia a España a reformar las pensiones y el mercado laboral, El País, 7  
December 2020.  
Blanco et al. (2020), Spanish non-financial corporations’ liquidity needs and solvency  
6
after the Covid-19 shock, occasional paper, Banco de España.  
7 As a proportion of GDP, the consolidated debts of non-financial corporations fell from  
08.2% in Q2 2010 to 61.0% in Q4 2019 (Bank of France data).  
1
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