March 3, 2021

Brussels lowers government growth forecasts for 2021 amid COVID uncertainty


Brussels improves by a couple of points, from 5.4% announced in November to 5.6% this Thursday, the growth forecasts for Spain’s GDP for 2021. Of course, the data, which does not quantify the hypothetical impact of the European recovery funds, is still far from that announced by the economic vice president of the Government, Nadia Calviño, who calculates a 7% growth for Spain this year. The data from the European Commission, however, depends a lot on how the vaccination campaign develops; how the new variants and mutations of the coronavirus behave, insofar as they can bring about new restrictions to preserve the health of citizens; and that the European anti-crisis funds begin to arrive, planned for the summer – the Government has 27,000 million from Brussels in the 2021 budgets. Brussels also foresees an improvement in its forecasts for 2022, and this Thursday announced a growth of 5.3%, higher than 4.8% announced in november.

The IMF lowers growth forecasts to 5.9% for Spain in 2021

The IMF lowers growth forecasts to 5.9% for Spain in 2021

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The Finance Commissioner, Paolo Gentiloni, acknowledged this Thursday that “Spain had a relatively positive fourth quarter among European economies and continued in positive numbers, 0.4%, and we understand that there will be a strong rebound in the next two years”. The Italian commissioner also explains: “We have not incorporated the effects of the recovery funds. Although the Spanish plans are well advanced, our services are working, now focused on the reform of the labor market and pensions. So still We cannot give a complete evaluation, we are working on certain details and certain figures with Spain. I have met with several Spanish ministers and they are on the right track. ”

In any case, Brussels warns: “There is a risk that the crisis will leave deeper scars on the economic and social fabric of the EU, especially through widespread bankruptcies and loss of jobs. This would also harm the financial sector, it would increase long-term unemployment and would exacerbate inequalities. ”

The International Monetary Fund (IMF), for its part, has already lowered the forecast for an increase in Spanish GDP for 2021 by 1.3 percentage points, leaving it at 5.9% – in line with Brussels – compared to 7.2% – close to the Government’s calculations – that had been forecast last October.

In any case, the forecasts of the Community Executive place Spain as the country that will grow the most this year, after having been the one that fell the most in 2020. After Spain (5.6% in 2021), France is located ( 5.5%), Croatia (5.3%) and Slovenia (4.7%).

The uncertainty is so great and the forecasts are so complicated to make that, precisely, the Community Executive predicted a fall in Spanish GDP in 2020 of 12.4%, when the INE data communicated at the end of January estimated the fall at 11% , in line with what is collected in the government’s macroeconomic table. Of course, that 11% drop was the highest among the 27 EU countries, followed by Greece (-10%), Malta (-9%) and Croatia (-8.9%), the countries most dependent on tourism of the EU.

The rebound that the Spanish economy had in the third quarter, with a growth of 16.4%, and in the fourth quarter, 0.4%, have not served to alleviate the huge hole left in the Spanish GDP during the months of closure and almost total paralysis of economic activity, although they did serve to highlight the November forecasts for Brussels. At that time, the Minister of Inclusion, Social Security and Migrations, José Luis Escrivá, already warned that the forecasts were “out of date” by not collecting data from the Labor Force Survey (EPA) and GDP for the third quarter, much better than anticipated.

After spectacular growth in the third quarter of 2020, after an even more spectacular drop in the second quarter, the European Union has collapsed at the end of 2020 due to the new waves of the coronavirus in the final stretch of the year. This is confirmed by the first approximations of Eurostat, to the statistical office of the EU. According to a first estimate of annual growth for 2020 made by Eurostat, GDP fell by 6.8% in the euro area and by 6.4% in the EU as a whole.

Against this background, the European Commission’s 2021 winter economic forecast projects that the euro area economy will grow by 3.8% in both 2021 and 2022, and that the EU economy will grow by 3.7% in 2021 and 3.9% in 2022. The data for Spain are much higher than the average: 5.6% in 2021 and 5.3% in 2022.

Brussels expects the euro area and EU economies to reach their pre-crisis production levels earlier than expected in the autumn 2020 forecast in November, largely due to stronger-than-expected growth momentum. expected at that time for the second half of 2021 and in 2022. However, he does not expect that to happen before the second half of 2022, and it will be different in each country, Gentiloni has recognized.

After strong growth in the third quarter of 2020, economic activity contracted again in the fourth quarter as the second wave of the pandemic triggered new restrictions. With these measures still in place, Brussels expects the economies of the EU and the euro area to contract in the first quarter of 2021; economic growth to resume in the spring and gain momentum in the summer as vaccination programs advance and containment measures gradually diminish. The Community Executive also foresees an improvement in the prospects for the world economy to support the recovery.

In any case, Brussels notes that the economic impact of the pandemic continues to be uneven in the Member States, so that the speed of recovery can diverge significantly.

In this sense, the risks surrounding the prognosis “remain high”, says Brussels, being “mainly related to the evolution of the pandemic and the success of vaccination campaigns.”

Thus, the “positive risks” are related to the possibility that the vaccination process will lead to a more flexible containment measures than expected and, therefore, to an earlier and stronger recovery. In addition, the recovery funds, the so-called Next Generation EU, “could drive stronger growth than projected, since the planned financing, for the most part, has not yet been incorporated into this forecast.”

In terms of negative risks, says Brussels, “the pandemic could turn out to be more persistent or severe in the short term than is assumed in this forecast, or there could be delays in the roll-out of vaccination programs. This could delay the relaxation of containment measures, which in turn would affect the strength of the expected recovery. There is also the risk that the crisis will leave deeper scars on the economic and social fabric of the EU, especially through widespread bankruptcies and loss of life. This would also hurt the financial sector, increase long-term unemployment and exacerbate inequalities. ”

Spain, with fewer restrictions than in the EU

GDP growth in Spain rebounded strongly in the third quarter of 2020 (growth of 16.4%), after the unprecedented contraction in the first half of the year (-17.8%). “The recovery was driven mainly by domestic demand, with a strong increase in both private consumption and investment,” explains the European Commission: “Net exports also contributed positively to GDP growth. Containment measures, which began to reintroduced in August, have continued and tightened even more, albeit less severely than in other large European countries. Mobility and social interaction activities declined, weakening economic activity in the last months of the year. However, growth of GDP in the fourth quarter remained in positive territory, at 0.4%, although domestic demand sharply reduced its growth rate. As a result, GDP decreased by 11% in the whole of 2020 “.

The short-term prospects for 2021 “are clouded by the increase in infection rates in the first weeks of the year and the more restrictive measures implemented by most of the Spanish regions”, says the Community Executive: “As a result , private consumption and investment are expected to fall in the first quarter before recovering slightly in the second. As the vaccination process progresses and restrictions are phased out, economic activity should recover strongly. ”

As a result, Brussels expects “the household saving rate to decline and investment to recover, driven by better expectations for the economy and less uncertainty. Overall, GDP is forecast to grow by 5.6% in 2021. In 2022, the recovery in tourism is expected to gain momentum, with most of the barriers to activity removed entirely, while domestic demand growth is likely to moderate once stifled demand reabsorbs. This would lead to a still robust growth rate of 5.3% “.

Government measures to protect jobs, such as ERTE, and those aimed at providing liquidity to companies taken in the first stage of the pandemic were extended several times and Brussels expects “that they will remain in force until mid-2021”. These public support measures have been possible thanks to the fact that the European Commission activated the escape clause that leaves the Stability and Growth Pact frozen. “In spring we will take the decision on the escape clause to give countries clarity for their budgets”, Gentiloni explained: “Our economic difficulties will not disappear on December 31, 2021. We will decide in the coming weeks.” Initially, the clause is activated throughout this year, and an extension is foreseen yet to be decided.

According to the European Commission, the Executive’s measures “will continue to help mitigate the loss of jobs and cushion the damage of the crisis to productive capacity”, although it warns of the risk “of an increase in business insolvencies, mainly concentrated in sectors most affected by activity restrictions, which materialize as public support measures are reduced. ” Consequently, “this could lead to an increase in unemployment and reduce productive capacity.”

On the positive side, Brussels acknowledges that the forecast released this Thursday does not incorporate the impact of the Recovery and Resilience Plan, “which is expected to provide a significant boost to domestic demand and growth over time once it sets in. on going”.

In relation to inflation, Brussels understands that “after decreasing in the second half of 2020, it is expected to rise to 0.8% in 2021, driven by the gradual strengthening of the price of consumer services and the reversal of the fall of oil prices in the second quarter of 2020. In 2022, headline inflation is expected to rise further to 1.1%. ”

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