The Spanish economy after the coronavirus: recession, unemployment and debt

Spain is facing one of its most complicated moments due to the COVID-19 outbreak in the country. The market assumes that the economic impact of the spread of the coronavirus and the drastic measures that the government has had to take to stop the contagion will take its toll on activity, employment, debt and deficit.

The scenario appears to be devastating in the short term and there are organisations such as the International Monetary Fund (IMF) that assure us that we could once again experience a situation at a global level that is just as critical as when the crisis broke out in 2008, and even worse. The only good news is that, as this is a temporary shock, everything points to a rapid and strong recovery.

In the case of Spain, economists are giving up on the year and believe that in 2020 the economy will go into recession, that more than a million jobs will be destroyed and that public deficit and debt will skyrocket. Let's see what numbers they are dealing with at the moment and under the premise that the emergency situation derived from the coronavirus will be under control before the summer months.

GDP

"The Spanish economy is facing the emergence of an unprecedented health crisis that is also having a significant economic impact. The transmission channels are multiple, coming from both the supply and demand sides, and it is affecting a large group of activities that have a large share of the Spanish economy's GDP," says Carlos Ruiz, director of studies at the Institute of Economic Studies (IEE). Until the arrival of the coronavirus, the market forecast pointed to a growth of about 1.6% this year.

Along the same lines, Rafael Pampillón, a professor at IE University, recalls that "there are calculations that indicate that, for every month of confinement, the GDP loses one point. Therefore, there is no doubt that the economic growth that we have seen since the recovery began in 2014 is going to disappear.

Maria Jesus Fernandez, senior economist at the Foundation of Savings Banks (Funcas), also believes that "the activity will enter recession clearly and will do so in all major Western countries (Germany, France, USA ...). In the case of Spain, the contraction will be well over 1% in annualised terms during 2020".

Juan Carlos Higueras, an economic analyst and professor at the EAE Business School, does not rule out the possibility that the fall will reach 3% and the research departments of BBVA, the Rafael del Pino Foundation and Fedea are already talking about a 4% drop. In any case, everything points to the fact that this year could be the worst year in economic terms in the entire democracy. For the moment, the reference is 2009, when, in the midst of the economic and financial storm, GDP fell by 3.8%.

However, as the director of studies of the IEE recalls, "this scenario will depend on the prolongation of the current state of alarm and the resolution of the main effects of the health crisis and, on the other hand, the impact of the measures approved to mitigate the effects of this crisis on economic activity. Therefore, it is essential that these measures are articulated as soon as possible". On the other hand, if the situation is not brought under control in the spring, the fall in GDP could be close to 10% for the year as a whole. This is a thesis that is already being handled by the U.S. investment bank Goldman Sachs and the IESE business school.

The most encouraging reading is that they all agree that the data for the second and third quarters (April to September) will be particularly bad, as a result of the halt in consumption, exports and tourism, although everything points to the economy starting to pick up in the fourth quarter and recovering much of the ground lost during 2021.

Goodbye to further falls in unemployment

We now turn to the employment market, which also has no hopeful prospects for 2020. In addition to the flood of workers who will be affected by the ERTE formula (temporary employment regulation scheme, which means that the contract is stopped and the worker becomes unemployed), hundreds of thousands of jobs are expected to be destroyed.

"In the realistic scenario, a month of almost total restrictions and an average 30% drop in activity could affect around half a million workers," says Javier Blasco, director of the Adecco Group Institute.

Pampillón, for his part, believes that the unemployment rate in Spain has reached a low point and that, with an economy that was already slowing down, a crisis like this and other additional pressure factors like Brexit, "it is very difficult for it to go down from now on".

In his opinion, the most important thing is to try to keep people on the payroll and, apart from the temporary measures, that "employment is maintained as much as possible so that, when we get out of all this, people continue to have an income. Because if jobs are destroyed, the unemployment rate will go up again," he says.

Higueras goes one step further and points out that there are studies that point to a loss of between one and two million jobs if the worst possible forecasts (a higher economic stop and an extension of the state of alarm) are true. In that case, "the unemployment rate could be between 18% and 22%," he says. Currently, the unemployment rate stands at 13.8% (it was close to 27% in 2013), is the second highest in Europe and is several times higher than in Germany, the UK or the USA.

As in the case of GDP, experts are calling for calm and expect a sharp improvement in the main labour indicators by the end of the year and, above all, over the next financial year.

In any case, Adecco says that what is clear is that "once the crisis is over, there will be sectors that will not be able to recover lost consumption (such as restaurants and hotels). The most affected sectors will be those with a greater presence of SMEs and the self-employed, which are highly concentrated in the service sector, small businesses and consumer-related activities, all of which are highly dependent on the population's purchasing power, while other activities will be strengthened, such as health, a large part of the industry, construction, food, logistics and transport sectors. And also those in which it is possible to work remotely, such as teaching, office work, or telecommunications".

Deficit and debt on the rise

Two other economic variables that will clearly worsen as a result of the coronavirus crisis are the deficit and the debt. What exactly are we facing? The consensus estimates that the public deficit will soar above 5% and could reach 10% (maximum levels since 2011, when rumours of an international rescue were haunting the Spanish economy) and that the debt of the general government as a whole will break records exceeding 100% of GDP, compared to 98% at present.

At the EAE Business School, they believe that among the money transfers that the state will make to the regions, direct aid and guarantees to families and businesses and the collection lost by taxes such as income tax (for ERTEs, layoffs ...), VAT (by the fall in consumption) and companies (lower profits of companies), "it would not be surprising that the deficit was 50 or 100 billion euros, and will have to be financed via public debt. And this amount, coupled with the fall in activity, could increase its weight on GDP to 110-115%.

This is the data that most concerns economists and businessmen, who describe it as the great problem of Spain in the medium term. Above all, because during the years of economic boom this variable has hardly improved.

"What is dramatic about this issue is that, during the years of economic recovery, we have not been able to reduce the public debt because we have maintained many unnecessary public expenditures. It's a problem because all this has caught us up in a lot of debt and now that we need to spend, we don't have that resource," says the IE University professor.

Along these lines, the Funcas senior economist adds that "with healthier public accounts we would have more room to implement more forceful measures, but currently we depend on decisions taken by Brussels at the Community level, on the European Central Bank (ECB) buying more debt and alleviating the financial situation of companies and on risk premiums being kept under control".

As a result of all this, experts assume that next year the state will be forced to make cuts in public spending (especially subsidies). The alternative to not cutting spending would be to raise taxes, a decision that would be counterproductive according to the economists consulted. "The word "cuts" is cursed, especially when parties are in power that are betting on increasing public spending. What the economy needs most are fiscal stimuli and lowering income tax, VAT and hydrocarbon taxes (which account for more than half of the price), but since I don't see it as compatible with the government's plans, we'll have to eliminate superfluous spending and cut back on part of the Welfare State to prevent the problems from escalating," says the SEA professor.

Cushioning the blow

Despite all these problems caused by the spread of the COVID-19 virus and the international uncertainties (such as Brexit and the trade war between the USA and China...), the experts also put on the table that the main tailwinds that have driven the economy in recent years will continue, which will help to cushion the economic shock.

The main ones are the low interest rates (they will remain at 0.0% at least until 2022), the low price of oil (the Brent, the reference in Europe, is moving close to 30 dollars per barrel, with a drop of 60% so far this year) and the weakening of the euro against the dollar (in recent days it has been revalued by the aid announced by the Federal Reserve).

All this will enable financing conditions to continue to be very favourable to companies and households, for Spain to save by importing crude oil and for exports, which already account for a third of domestic activity, to take a break.