CORPORATE | 04.23.2020
The impact of COVID-19 on the Spanish economy: a consensus of 35 firms
Recent forecasts by the IMF and the Central Bank of Spain on the world economy, and on the Spanish economy in particular, have led to a clash with the reality that is to come. The impact on activity caused by the health crisis is going to deal the economy an unprecedented blow. And this will be greater or smaller depending on how long the restrictive measures to contain the virus are maintained. In this sense, Spain and Italy are the most disadvantaged countries within the eurozone.
The IMF expects Spanish GDP to contract by 8 percent and unemployment to reach 20.8 percent by the close of the fiscal year. If the economy does indeed contract by 8 percent, it would be the worst data recorded in the entire historical series of the Spanish National Institute of Statistics (INE), which began in 1970. “This a crisis like no other,” said the IMF’s chief economist Gita Gopinath, who has warned that uncertainty over its duration and intensity must be added to the magnitude of the shock.
On Monday, the Central Bank of Spain indicated that it estimates that activity fell by 4.7 percent quarterly between January and March. Over the course of the year, this figure could worsen, to a range of between 6.6 percent and 13.6 percent with an unemployment rate of between 18.3 percent and 21.7 percent depending on how long the containment measures last and how long it takes to return to normality.
Likewise, like the Central Bank of Spain, MAPFRE Economics has preferred to offer a range of estimates on the economy given the uncertainty over the real impact of COVID-19 and the effect that decisions on economic and social policy may have, not only in Spain, but in the rest of the world. Therefore, based on one baseline scenario and another stressed scenario, MAPFRE economists forecast a contraction in GDP of between 5.6 percent and 10.7 percent.
The Spanish economy grew 1.8 percent in the fourth quarter of 2019 and 0.4 percent on a quarterly basis, leading to an average for the year of around 2.0 percent. Economic activity was already on a downward trend before it was impacted by the health crisis and the consequent economic standstill that will be visible in the figures from the first quarter. “Spain will quickly enter into recession, as the first indicators show. Unemployment rose by 302,000 in March without counting the cases of temporary layoffs (ERTEs) although there is a consensus that some of these people will never return to the labor market,” they said in MAPFRE Economics. In the current scenario, the standstill in proximity sectors (which Spain specializes in) could increase the unemployment rate, according to these economists, to around 18 percent by the end of 2018. In a more severe possible scenario, unemployment could reach levels equivalent to those of the 2009 crisis (23.4 percent). “We expect a recovery in the third quarter, which will be gradual as the service and tourism industries will not have recovered completely. It is difficult to estimate structural damage with regards to businesses and employment that fail to fully recover,” MAPFRE Economics added.
In this scenario, MAPFRE Economics outlines several risks:
- A very long extension of the standstill period and a loss of jobs and small businesses that fail to recover. In the best of scenarios, recovery may begin in May, but it will be gradual and there are industries such as tourism and hospitality that may take longer to recover because of the social distancing measures that will surely remain in place.
- Regardless of the state in which the country may find itself in 2021, the recession and the activation of stabilizing measures will have a colossal impact on public accounts, not only because of the current expenditure needed, but also because of the decrease in revenue derived from economic activity.
Economic Research points out that Spain already started from an “eminently weak” fiscal position. “We expect debt to exceed 115 percent of GDP by the end of 2021, although we appreciate that there will be some margin thanks to the low interest rates and sovereign debt stress-control measures derived from the ECB’s balance-sheet policy,” they conclude.
Given the existing uncertainty, which makes it more difficult to forecast, the ranges included in the forecasts from private agencies are broad. According to a compilation by MAPFRE of a total of 35 private firms that have updated their forecasts since April 1, the most pessimistic firm would be Unicredit, which forecasts a contraction of 15.5 percent and the most optimistic being the Japanese firm Sumitomo Mitsui, with only -0.4 percent. The consensus carried out with these firms results in a drop of 6.02 percent in 2020 and a recovery of 4.88 percent in 2021.