July 29, 2021

The Bank of Spain improves its forecasts but doubts about the execution of European funds




Spain begins to see the light at the end of the tunnel due to the advance of vaccination and the relaxation of restrictions, although the economy still faces severe vulnerabilities (very high debt and deficit) and risks (doubts about the execution of EU funds). This is the conclusion drawn from the latest projections report of the Bank of Spain, released today, in which the institution improves its forecasts compared to March.

The organism proposes three scenarios: favorable, central and adverse, the latter being the one to which the greatest reliability is granted. Three months ago I anticipated that
GDP would rebound by 6% in 2021, 5.3% in 2022 and 1.7% in 2023 in the central scenario
. Now these figures are 0.2, 0.5 and 0.1 percentage points higher. «The projections contemplate a continuation of the phase of notable expansion of the activity until the end of 2021, in line with the recovery of the productive branches that until now have been most affected by the restrictions in the face of the pandemic, “reads the document. Looking ahead to 2022, there is also a considerable positive carry-over effect. Thus, in the most adverse scenario for the economy, the rebound would be 4.6%, 5.2% and 1.7% in each of the three years ahead until 2023.

The recovery of Spain is already underway after the downturn suffered since the end of 2020 with the new restrictions on mobility and activity. In the fourth quarter of last year there was no growth and in the first of this year
GDP fell 0.5% in quarter-on-quarter terms
s. The situation in this second quarter that is about to end is quite different. The Bank of Spain the rebound in activity, which “has intensified notably during the second quarter of the year, in line with the more favorable evolution of the pandemic.” In this sense, the institution estimates that the economy will grow between April and June by 2.7% in the favorable scenario, 2.2% in the central one and 1.4% in the adverse scenario. The intense recovery of the services sector in the heat of a certain normalization of activity is boosting the economy. Even so, the body led by Pablo Hernandez de Cos is cautious: “However, the uncertainty about the magnitude of this rebound is high”, due to the lack of sufficient data and the difficulties that arise in making predictions taking into account the comparison with the same period of 2020.

The institution highlights that «GDP would not reach its pre-pandemic level until the last stretch of 2022 and it would be 1.9% above it at the end of the projection horizon “in the central scenario, which shows that although the crisis has transitory effects, they are also” persistent “.

The light at the end of the tunnel will also be seen in terms of unemployment, where the supervisor predicts a more favorable evolution than in March. The Bank of Spain estimates that the unemployment rate will be 15.6% in 2021, 14.7% in 2022 and 13.7% in 2023, always on the center stage. In the adverse, the percentages climb to 16.2%, 15.7% and 14.6%, respectively.

“The hours worked They will resume an upward path from the current quarter, in line with the recovery of the product (GDP). The growth in hours worked would be 6.7% in 2021, an advance that would moderate to 5.4% and 1.8%, respectively, in 2022 and 2023 ». Thus, if these projections are fulfilled, our country would have an unemployment rate four tenths lower than that of 2019, that is, to the pre-Covid stage.

European deficit, debt and funds

In any case, the good news that the report transmits is counteracted by two aspects that are always in the ‘must’ of the actions of the government: the high public deficit and debt ratios. To all this, in addition, we add the «uncertainty» that the Bank of Spain appreciates about the execution of European funds.

The agency recognizes that “the degree of detail on the projects to be undertaken with the resources of the NGEU it is now higher “, but also highlights that” there is still a considerable degree of uncertainty regarding the rate at which these funds may be absorbed by the Spanish Public Administrations and, consequently, regarding their timing. Doubts that the Bank of Spain has had for several months.

The general director of Economy and Statistics of the Bank of Spain, Óscar Arce, has explained that they do not foresee major changes in the absorption and impact of European funds in 2021, but rather more for 2022 compared to the March forecasts. The contribution to GDP – what it would contribute to the economy – that they calculate would be 1.8 points in 2023. Likewise, it has added that a good part of its multiplier effect on economic activity It will depend on the speed in the execution of this money and the quality of the projects to whom it is intended.

«In the new projections for 2021, around 50% (absorption) of the amount announced by the Government for this year is incorporated, considering both the funds of the Mechanism of Recovery and Resilience (MRR) like the so-called React-EU. For the entire projection horizon, absorption would be slightly above 80% of the total funds available in the form of transfers, concentrating the greatest boost in 2022 “, the document adds.

The public deficit, for its part, is one of the blackest points in the report since “in 2023 it will remain at still very high levels (4.3% of GDP).” In March, the projections in the central scenario were at 7.7% in 2021, 4.8% in 2022 and 4.4% in 2023. Now they are in the 8.2%, 4.9% and 4.3%, respectively. Arce attributes this worsening, mainly, to the negative effect that the extension of public measures such as the ERTE, as well as the introduction of new measures to support companies such as direct aid, which “would add one more point of deficit” to all the calculations, with a net effect of half a point more.

The same concern occurs with public debt, which «would barely fall by 2 pp in the projection horizon». This would thus remain at 120.1% in 2021, 117.9% in 2022 and 118% in 2023, in the central scenario. In the adverse it would be at 122.6%, 122.1% and 123.4%, respectively.

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