Uncertainty, uncertainty and uncertainty. This is one of the most repeated messages in the latest macroeconomic projections report of the Bank of Spain. Doubts about when the recovery will come and doubts about the impact of the execution of European funds. Few certainties for the national supervisor which, this time, in contrast to September, has chosen to propose three scenarios based on the evolution of the pandemic: mild, central and severe.
From the most immediate to the most distant. Nadia calviño, economic vice president, and Jose Luis Escrivá, Minister of Social Security, have projected these months that the Spanish economy would grow between 1.5 and 2.4% in the fourth quarter. Here the institution led by Pablo Hernández de Cos gives the Government a reality check in its forecasts: the quarter-on-quarter GDP evolution for this last period of the year will be 0.6%, -0.8% or -3%, depending on the scenario. This supposes, at least, seven tenths less than what the Executive predicts. The second wave and accompanying restrictions could return Spain to negative territory in the fourth quarter, delving into a black year for the country, despite the optimism of the Government.
Now, with a view to future years, the supervisor is clear: “In relation to the scenarios presented last September, the technical assumptions on which the current projections rest are somewhat more favorable for economic growth.” Looking at the next three years, his estimates are better than those he projected in September, although it must be taken into account that on this occasion the Bank of Spain already includes the possible positive effects of the injection of European funds as of 2021.
For 2020, the Bank of Spain calculates a GDP collapse of 10.7%, 11.1% and 11.6% in the mild, central and severe scenarios, respectively. This is slightly closer to the -11.2% expected by the Executive. Looking ahead to next year there are already greater differences: 8.6%, 6.8% and 4.2% by the supervisor, compared to the 9.8% calculated by La Moncloa. A good part of this divergence could be explained by the fact that the institution led by De Cos does not believe that community money will have as high an impact as what the Government says. Specifically, the latter predicts that they will 2.6 points of GDP in 2021, and the public institution lowers it to 1.3 points. “The lower boost in activity compared to the plans included in the PGEs would be due to the assumptions about a lower degree of absorption of funds and a smaller fiscal multiplier,” the report highlights.
Thinking in 2022 and 2023, the recovery would lose intensity, to 4.8% and 1.9%, respectively, taking the most optimistic scenario, and 3.9% and 1.5% in the most pessimistic. In any case, the return to pre-pandemic GDP levels does not seem easy or fast. In the September forecasts, the Bank of Spain already warned that full recovery might not reach beyond 2022. And in this document it points to somewhat more specific, but still uncertain, deadlines: «The persistent footprint of the health crisis on the activity would make the recovery in the level of GDP prior to Covid-19 would not occur until mid-2023 in the central scenario, while, in the severe scenario, the output of the economy would still be at the end of the projection horizon 2.8% below the level at the end of 2019. Under the In a mild scenario, this level would be reached between the end of 2021 and the beginning of 2022, thanks to the more rapid resolution of the health crisis and the low magnitude of the lasting damage on the productive capacity of the economy. In other words, if the worst scenario is consummated, it could not return to pre-pandemic economic levels until 2024.
In the eyes of the Bank of Spain, the crisis “Will leave lingering effects” on economic activity, “even after the definitive elimination of the limitations that weigh on its normal development as a consequence of the pandemic.” In this sense, the supervisor emphasizes that, despite the measures put in place to prevent business insolvencies, this may not be enough to avoid “certain bankruptcy situations.” Related to this, «national demand will subtract between 10.3 pp and 9.5 pp from growth in 2020, depending on the scenario (and, in particular, 9.6 pp under the central one), while external demand will cut it by 1.5 pp “. Thus, the savings rate would continue to be high among households (in crisis, it usually tends to increase), and private consumption could not fully recover even in 2023 in the severe scenario.
The hit on employment
In terms of the labor market, the agency indicates that “there will be jobs that will not overcome the crisis and that will lead to a certain increase in long-term unemployment.” So, hours worked “will register a notable contraction”, to 11.4% in 2020, and pre-Covid levels may not recover until 2024 in the most adverse scenario.
The institution, however, warns of the risk of “hysteresis phenomena in the labor market”, that is, even if the cause that originated the labor crisis – coronavirus – disappears, a high unemployment rate will be perpetuated. According to their forecasts, unemployment would reach up to 16.2%, 20.5%, 18.1% and 17.6% between the years 2020-2023 successively. Very high percentages, which in the central scenario would remain, in those same years, at 15.8%, 18.3%, 15.6% and 14.3%. The Government, for its part, predicts that unemployment will be at 17.1% this 2020 and at 16.3% next year. The clearest difference with the Executive’s prediction is in 2021 since the Bank of Spain expects that it will shoot several points that year.
Doubts about European funds
The Government presented its recovery plan two months ago, with the incorporation of part of the European funds. More than 70,000 million to be executed in the next three years, mainly dedicated to digitization and energy transition. Thus, the economic rebound relies, to a large extent, on this money, with an expected impact of 2.6 points on GDP annually. The Bank of Spain it is much more prudent, for various reasons.
“The uncertainty about the ability of Public Administrations to absorb such a high volume of resources in such a short period is very high,” he indicates in his projections, while reviewing that the Spanish plan, together with the French, is one of the more ambitious of Europe regarding the volume of funds absorbed and the anticipation of terms. The truth is that, as the institution recalls, specific projects to which the community games are going to dedicate are still unknown.
Regarding the execution of the funds, the Bank of Spain points out that they may not be used in their entirety. «The projections incorporate around 70% of the investment spending announced for 2021, a percentage that gradually increases as time passes, until it reaches 85% in 2023. All this implies that, throughout the projection horizon, it will be executed spending for slightly more than 80% of the resources available in transfers from the NGEU (about 5% of the expected GDP) “, he indicates. On the other hand, the Government thinks that it will be able to implement 100%, when the «historical evidence» shows that in similar cases of the past, «after the first two years of these programs, the Spanish Public Administrations have only managed to execute for an amount of around 30% of available funds ”.
Evolution of public finances
“The health crisis has also led to a very marked deterioration in public finances,” the report states. In the central scenario, with greater probability, the deficit would reach the 10.5% this year, and would remain “at very high levels” in future years. Specifically, at 4.5% in 2023 for that scenario.
Regarding public debt, this will also register a very notable increase this year to close to 120% of GDP in all scenarios. In the future, the outlook differs: “While in the central scenario the debt would tend to stabilize around the level of this year, in the mild scenario it would decrease by about 5 pp and in the severe scenario it would increase by an additional 10 pp”. In this regard, it should be remembered that the Bank of Spain has repeatedly emphasized the need for a fiscal consolidation plan in order to manage public finances in the coming years.