July 29, 2021

The Bank of Spain raises its growth forecast for the Spanish economy in 2021 to 6.2%

Good prospects for the Spanish economy. The Bank of Spain released its second quarterly report on the Spanish economy this Monday, in which it appreciates an improvement in all indicators. If in the first quarter of 2021 the GDP suffered a contraction of 0.5% due to the third wave of the pandemic and the delay in the arrival of European fundsSince then there has been a notable upturn in activity in the second quarter so that GDP growth is expected to reach 6.2% this year, two tenths more than in the previous forecast. The most relevant of these new perspectives is that the Bank of Spain is that the lower incidence of the pandemic and the execution of the projects of the European funds of the Next Generation EU (NGEU) program would have a high positive impact on the advance of the GDP in 2022, up to 5.8%. In 2023, the growth rate of the Spanish economy would be 1.8%, returning to pre-pandemic levels.

There are additional factors driving the Spanish economy. First, Spain’s trading partners are experiencing gradual improvement, favored by continued support from global economic policies. The improvement in Spanish export markets has been particularly pronounced in the case of the United States, where the outlook for economic activity has been favored by recent fiscal policy announcements, and, to a lesser extent, in the United Kingdom.

In the new projections for 2021, around 50% of the amount of European funds announced by the Government for this year is incorporated, which represents about 27,000 million euros. For the entire projection horizon, absorption would be slightly above 80% of the total funds available in the form of transfers, with the greatest boost concentrated in 2022.

Despite the evident economic improvement, the Bank of Spain points to two clear risks in the future. On the one hand, the degree of uncertainty continues to be high due to the possibility that the high circulation of the virus in wide regions of the world could lead to the appearance of new varieties that are resistant to vaccines, which could lead to new restrictions on the tourist flows. On the other hand, a hypothetical upturn in business insolvencies would lead to job losses and a deterioration in the capital of financial institutions, which could adversely affect their ability to grant credit.

However, the Bank of Spain researchers recall that the monetary policy adopted by the ECB and the fiscal policy actions in Spain “will continue to provide important support for aggregate demand and the income of private agents.” Both measures will limit “the traces that the crisis will leave on the productive and labor fabric in terms of the destruction of companies and an increase in structural unemployment. In this way, the magnitude of the phenomena of financial amplification of the crisis, resulting from the feedback between the deterioration in the solvency of companies and households, on the one hand, and financial institutions, on the other.

With these data, the unemployment rate in 2021 would be reduced from the 16% predicted in the first part of the year to 15.5%, in a context in which the activity rate would also recover. An important element is that the consequences of the crisis on the productive fabric “will have a modest relevance” since the unemployment rate in 2023 will be 13.7%, four tenths lower than that observed in 2019, “without this being the reflection of a decrease in the workforce that is expected to grow by 0.4% between 2019 and 2023 “.

In May, the total affiliation grew by almost 212,000 people -an increase very similar to that which occurred in the same month of 2019- and the number of workers in ERTE registered a new decrease, reaching an average of 573,500 in the month. As a result of all this, in May effective affiliation was 4.4% below its pre-crisis level.

Although the CPI reached 2.7% in May, the Bank of Spain points out that inflationary pressures in the euro area remain modest, and are associated with temporary factors such as the increase in energy prices. Thus, the impact of this component on the headline inflation rate is expected to be transitory and after a few months, it will fall below 2% again.


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