Spanish Economy Outlook 2021

The Spanish economy faces this year in a very precarious balance. The Spanish GDP was probably the one that sank the most in the entire developed world last year, with a slump in the activity of around 11% or 12%, according to most of the national and international welfare agencies. And, although it is assumed that 2021 will be in relative terms a good year for the economy, the magnitude of the recovery is subject to many factors, such as vaccination capacity, the effect of European funds, the endurance capacity of the companies, or the greater confidence of national and foreign consumers. All this can make this year historical either if practically all the ground lost by the COVID-19 might be recovered or, on the contrary, the recovery is so insufficient that the economy does not regain its pre-crisis size until 2025 or 2026.

Savings' Increase To Be Transformed Into Expenditure

The scenario seems favorable for economic recovery, and more so after vaccines become already available with the launch of Oxford-AstraZeneca. Vaccination is crucial, especially in countries like Spain, which are highly dependent on foreign tourism. Restrictions this summer depend to a great extent on the fact that a large part of the local population, especially risk groups, is already vaccinated in the first half of the year. This could trigger a virtuous circle on the economy allowing supply and demand to be relaunched while releasing a good part of the savings accumulated this year due to confinement and the fear of contagion by consumers.

Specifically, the Bank of Spain estimates that the household saving rate rose to 25% of gross disposable income in the second quarter of the year, double the usual, and would also have been well above normal during the rest of 2020. This means a large amount of money that may re-enter the economic cycle quickly when sanitary conditions normalize.

Uncertainties Around Vaccination Hinder Economy Boost

However, vaccination also poses a serious risk in the event that it fails to catch up cruising speed before summer, as this would imply that Spain would continue to be a risky destination for international visitors, while other countries could offer more safety or more freedom to its tourists. And that, in turn, could generate a new vicious circle for activity, because many companies are torn between closing or staying, and the poor prospects for the summer tourism campaign could accelerate the decision towards this first option.

"13,468 companies in Spain were closed last November (94 of them with more than one hundred workers)."

Likewise, closings can greatly slow down job creation in the near future, because a company that reduces its workforce through ERTE or layoffs can increase it again very quickly if demand reactivates, but this possibility is lost with the definitive closure. In fact, a very worrying indicator is that 13,468 companies in Spain were closed last November (94 of them with more than one hundred workers) due to a large extent to the growing restrictions that were looming ahead of Christmas and seem to remain around for a while.

Spanish Unemployment Rate: What To Expect

In fact, the employment forecasts are not at all promising despite the recovery in GDP, even if one looks at the forecasts of the General State Budgets, which are among the most optimistic. It is true that in hours worked, employment will grow strongly compared to the catastrophic situation of last year (the Government speaks of a rise of 7.2%, much higher than the 3.1% predicted by the consensus of the Fundación de Cajas Savings), but unemployment will remain at 16.3%, on average, the same figure as in Q3 2020, according to the latest data available. And that means that, although each employed person will have a greater workload on average, especially in comparison with the confinement of March and April, there will not be more employed workers.

"The number of unemployed will increase by almost 284,000 people [...] as predicted by sixteen of the twenty analysts on the Funcas panel."

This will make the recovery in consumption much slower than if the advance had been concentrated on the number of jobs since the economic literature shows that those who find a job have a higher marginal propensity to consume than those who enjoy increased wages. What is more, there is also the possibility that unemployment will continue to rise across 2021, as predicted by sixteen of the twenty analysts on the Funcas panel. Taken together, the consensus anticipates that the number of unemployed will increase by almost 284,000 people, leading to a very uneven recovery, where some workers would have recovered quickly and almost completely from the crisis while others would have lost their jobs.

European Funds

The European recovery plan (Next Generation EU) is the other great hope for growth, to the point that the Government expects them to boost the economy by 2.6 points of GDP, reaching doubling the growth of investment, but they are also the second big unknown. On the one hand, it is not known to what extent it will be possible to capture 100% of the financing promised by Europe since that depends on the presentation of solvent projects. In fact, although the comparison with the execution of other programs cannot be extrapolated, the European Court of Auditors points out that Spain is one of the countries that has managed to attract the least funding from the 2014-2020 Multiannual Financial Framework, only 34% of the funds available.

On the other hand, the schedule of the Next Generation EU Plan indicates that the execution of the program will be delayed to the final stretch of the year, so it is very unlikely that they will have a strong effect throughout 2021; on the contrary, a good part of this impact will carry over to the next few years. To this, must also be added the difficulty of getting suitable projects, since they need to be viable in themselves (that is, they do not become a continuous sink of spending in the future) and increase productivity. And all this seems more complicated when at the same time the Ministry of Economy seeks to maximize the impact in the short term by forecasting a multiplier effect of 1.2 in the short term (that is, for every euro spent, the economy will be boosted by an additional 1.2 euros) when the Bank of Spain uses a multiplier of 0.7 that has decreased steadily over the last decades.

Challenges On The Way For Recovery

The great challenge presented by these funds is that their impact in the long term is greater than in the short term, given that higher productivity should imply future growth. However, a much more important factor in encouraging investment and improving productivity are structural reforms, which can amplify the effects of these investments and make them more durable over time. And here the European Commission calls for an important battery of measures that include greater labor flexibility, greater efficiency of public services, market unity, electrical interconnections, digital infrastructures or pension reform, and European funds can function as an incentive.

However, this disciplinary factor can also play against the Spanish recovery if, in the face of the reforms demanded by Brussels for the distribution of funds, the Government insists on maintaining its initial plans, which included a labor counter-reform, generalized tax increases and a constant increase in public spending that threatens to become structural. Although the Government has not carried out the labor counter-reform, it has threatened on numerous occasions to execute it, including it even in a pact signed with United Podemos and Bildu, which raises the fear of investment and hiring by employers.

In addition, the stoppage of tenant evictions in the last weeks of last year also poses a threat to a legal certainty that will reduce investment in the real estate sector. Finally, the General State Budgets include a barrage of new taxes that will affect salary income, savings, consumption and business profits, among many others, which will weigh down the recovery.