SPAIN

The economy contracted strongly by -4.3% y/y in Q1 2020 (-5.2% q/q), which reflects the effects of one of the most stringent lockdowns in Europe in Q1 (mostly March). We expect the trough of the crisis to be reached in Q2, with GDP falling by as much as -19% q/q, as the lockdowns were extended in April until the end of May.

In fact, economic activity fell in March but really collapsed in April as lockdowns lasted the whole month: industrial production was down approx. -22% m/m and -34% y/y; the unemployment rate rose from 14.2% in February to 15% in April; retail sales dropped -19.4% m/m and close to -30% y/y.

Sentiment and high-frequency data suggest that April was the trough of the crisis; but the economy should post a strong contraction in Q2 overall, especially since the lockdowns lasted longer than in neighboring France (notably for Madrid and Barcelona). We forecast a gradual U-shaped recovery starting in H2. We forecast the Spanish economy could contract by -11% in 2020 and grow +7% in 2021. GDP could only come back to its pre-crisis level in 2022. In our alternative scenario of protracted crisis, GDP could fall by -20%.

The direct fiscal relief package in Spain (1.8% of GDP) was less ambitious than in Germany (3.6% and an additional 3.8% of GDP for recovery plan) and France (4.7%), which also explains the strong GDP growth adjustment despite Spain’s higher momentum when entering the crisis (Spain grew by +2% in 2019).

Spain should benefit from the EU-wide relief programs i.e. ultra-accommodative ECB monetary policy and Next Generation EU program. First, Spain’s financing conditions will remain accommodative (low borrowing costs) at least until mid-2021 (horizon of the exceptional PEPP ECB bond-buying program) and most probably until end-2022 (when the ECB will stop reinvesting the proceeds of bonds it bought). This will prove crucial as the debt-to-GDP ratio spikes to between 115% and 120% of GDP. Second, Spain will receive 15% of the EUR500bn total of grants to be allocated by the Next Generation EU program, which represents 6% of its GDP or around EUR75bn. Spain will also be able to take advantage of a share of the EUR250bn loans of the program.

Policymaking during the recovery could be titled towards households and a green stimulus, as the two center left and left-wing governing parties have initiated a rebalancing of the economy to benefit consumers more, after years of reductions in corporate taxation and labor market reform following the Eurozone crisis. Striking the balance between helping companies and catering to the needs of the electorate will be delicate. In the medium-term, the pre Covid-19 commitment of Spain to shift towards green growth with an ambitious stimulus plan could help the country get back on its feet and create new opportunities.