OECD Economic Outlook, Volume 2020 Issue 1

Spain

The economy is projected to contract by 14.4% in 2020 in a scenario with a second virus outbreak later in the year, and by 11.1% in a scenario assuming that the pandemic subsides by the summer. The subsequent recovery in 2021 will be slower in the former case, at 5%, compared to the rebound of 7.5% in the single-hit scenario, given more persistent effects on labour markets and the financial situation of firms and households. In both scenarios, the fall in domestic demand, due to job destruction and the shutdown of activity, is the key driver of the contraction. The drop in external demand, especially in tourism services, will also weigh very strongly on the economy in 2020.

The government has taken significant measures to support employment and provide liquidity to the economy. The expansion of hospital and testing capacities and the rapid identification of infected people will be crucial to prevent further outbreaks. As the recovery commences, the use of short‑time work schemes will need to become well‑targeted and gradually replaced with labour market policies to help firms and workers in sectors with persistent negative effects shift into activities with better medium‑term prospects. Liquidity support should also be targeted to solvent firms with cash‑flow problems, especially in sectors where the end of the shutdown is delayed.

Spain has been hit hard by COVID-19

The first diagnosed case was reported on 1 February, followed by a rapid increase in the second half of March. The number of new daily cases and deaths peaked in early April, with Catalonia and Madrid the most affected regions. The capacity of the health system was lower than the OECD average going into the crisis, with fewer intensive care beds, but their number had more than doubled at the peak of the crisis.

Spain: Two scenarios of real GDP and two scenarios of unemployment

Source: OECD Economic Outlook 107 database.

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Spain: Demand, output and prices (double-hit scenario)

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Some of the containment measures, which include the closure of schools and universities, mobility restrictions and the suspension of most retail and industry activity and a nationwide lockdown as from 14 March, have been gradually lifted since 10 May. EUR 4.6 billion was allocated to meet increased healthcare and research needs, and the VAT rate on purchases of medical healthcare material was reduced to zero.

Confinement measures restricted economic activity

Real GDP fell by 5.2% in the first quarter of 2020, driven by a collapse in domestic demand. Economic activity is expected to have decreased by around 30% during the lockdown, relative to a normal period, given the high share of accommodation and food services and wholesale and retail trade in the economy. Consumer confidence and new private car registrations declined in March and April. The number of international tourists fell by 64% in March, compared to a year earlier, and was zero in April due to border closures. Retail trade recorded its largest drop in history in March. There are some early indicators of economic rebound now that confinement measures have been eased. Overall, the number of social security contributors declined by 760 082 between 12 March and the end of May, but rose in May compared to April. Following sharp declines to historically low levels in April, the manufacturing and services PMIs recovered slightly in May, but remained at a low level.

Spain: Demand, output and prices (single-hit scenario)

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The policy response has been extensive

The main government income support measures include short-time work arrangements, increased sick pay for infected or quarantined workers, benefits for cessation of activity by the self-employed, extension of the coverage of unemployment benefits, increased regulation of dismissals due to COVID-19, and support to meet payment obligations, such as rent and other loans. A guaranteed minimum income scheme was recently approved by the government. Several exemptions, deferrals and moratoria on social security contributions and taxes were introduced, together with public guarantees on loans to private firms, especially SMEs (EUR 104.4 billion), to provide liquidity to viable firms and the self-employed. Policies taken at the European level, notably large-scale financial asset purchases by the European Central Bank, will also support low financing costs and lending.

The historical drop in activity will be followed by a gradual recovery

The two main scenarios are of a single pandemic outbreak, which assumes the gradual opening up of economic activity after the end of the lockdown, and that of a second outbreak in the final quarter of 2020. Both scenarios imply a sharp fall in export market growth and disruptions to global value chains in 2020. The recovery will be driven by the realisation of postponed consumption and investment. However, heightened uncertainty and the high share of tourism in GDP will mute the speed of recovery. In the scenario with the additional outbreak, the negative effects on activity will be more severe and persistent, due to a higher number of insolvencies and longer unemployment spells, despite assumed additional policy support. The budget deficit and the public debt‑to‑GDP ratio are projected to rise sharply, with the latter (Maastricht definition) reaching 117.8% in the single-hit and 129.5% in the double-hit scenario in 2020.

A slower-than-assumed recovery in tourism and trading partner growth could limit exports further. Greater uncertainty and more persistent effects on household and firm solvency could restrict the recovery in domestic demand more than projected. The latter could also magnify the spillover effects in the financial sector, via a significant rise in non‑performing loans.

Further well-targeted policies would contribute to an effective recovery

Some of the current measures will need to be continued and refined to lower the risk that the transitory shock turns into a more permanent effect on activity. As the recovery commences, the gradual scaling back of short‑time work schemes and stronger active labour market policies, particularly retraining schemes, will help ensure an efficient reallocation of labour from sectors facing extended weak demand. Further policies may be warranted to relaunch the tourism sector, which will require co-operation with the private sector and across different levels of governments. Additional liquidity aid and public guarantees, focused on solvent businesses with cash‑flow problems, might be needed to lower the rate of insolvencies, which can otherwise create an adverse feedback loop between the real and financial economy. These should be accompanied by close financial supervision of individual financial institutions, given the considerable heterogeneity in their sectoral and geographical exposures. Temporarily boosting public investment, with a specific focus on green investment, would help kick-start the recovery and reduce air pollution, which is above European averages, in major cities.