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SPAIN

Jobs at risk, ill-timed political fragmentation

A1

LOW RISK for enterprise

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

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GDP
USD1394,1bn (World ranking 13, World Bank 2019)
Population
47,08mn (World ranking 30, World Bank 2019)
Form of state Parliamentary monarchy
Head of government Pedro Sánchez
Next elections General elections, 2023
  • Good performance and competitiveness in some specific sectors, although competitiveness gains are starting to reverse
  • Presence of large international companies
  • Fiscal deficit now below 3% of GDP, and public debt-to-GDP ratio has started to decrease
  • Bridge between Latin America and the rest of the world
  • Large economy
  • Good infrastructure network
  • Still high public debt (>97.4% of GDP)
  • High private debt
  • Still high unemployment (14.5%) despite progress
  • No recent structural reform on education and training
  • Fragmented political landscape, internal tensions over sovereignty issues (Catalonia)
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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).

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Job market woes and political fragmentation

The main risk lies in the job market for Spain, as we have estimated that close to 9mn jobs are at risk. We see the unemployment rate ending the year at 18.1% in 2020 (17.2% on average) and 16.9% in 2021 (17.8% on average). The duality of the job market and the 2012 labor market flexibilization reform mean that if the tourism sector does not recover, temporary jobs won’t recover either, and that the labor market tends to be procyclical (more layoffs during a crisis). But these forecasts will very much depend on the orientation of public policy. Indeed, as of early June, close to 3mn people were still benefiting from temporary employment schemes (16% of the labor force). It is likely that the government will prolong those schemes for key sectors relating to tourism and hospitality beyond 30 June and until the end of the year; these workers represent around a third of employees currently receiving such benefits. The unknown for 2020 is the fate of the remaining 2mn. In 2021, the 1mn tourism-related workers will see their schemes end, which could also add to unemployment figures.

As political fragmentation has yielded tensions during the crisis, it could hamper the post-crisis momentum for reforms. The current center-left/left-wing government is the first coalition government of Spain’s recent history amid a highly fragmented political landscape. It is likely that the government will have to make concessions to regionalist parties, and that policymaking will be frustrated by the continuing disagreements between the two governing parties (PSOE socialist party and left-wing Podemos).
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The EU to the rescue, and a green stimulus

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.

Trade structure by destination/origin

(% of total)

Exports Rank Imports
France 15%
1
14% Germany
Germany 11%
2
11% France
Italy 8%
3
7% China
United Kingdom 8%
4
7% Italy
Portugal 7%
5
5% Netherlands

Trade structure by product

(% of total)

Exports Rank Imports
Road vehicles 19%
1
13% Road vehicles
Vegetables and fruits 7%
2
8% Petroleum, petroleum products and related materials
Articles of apparel & clothing accessories 5%
3
6% Articles of apparel & clothing accessories
Medicinal and pharmaceutical products 4%
4
5% Electrical machinery, apparatus and appliances, n.e.s.
Electrical machinery, apparatus and appliances, n.e.s. 4%
5
5% Medicinal and pharmaceutical products
Payment terms and late payment interest are regulated in accordance with applicable EU rules; however the standards put in place are among the most lenient in Europe. As a result, DSO remains excessive at around 69 days.

  • Low

  • Medium

  • Sensitive

  • High

  • Payments

  • Court proceedings

  • Insolvency proceedings

  • Payments

  • Court proceedings

  • Insolvency proceedings

The court process is a major complication when it comes to collecting debt and it is advisable to first conduct negotiation with the support of collection specialists. When court is needed, Alternative Dispute Resolution methods and foreign courts (EU judgments will be fairly enforceable in Portugal) may be worth considering in order to avoid inefficient domestic courts.

Despite reforms conducted in 2012 to increase company rescue possibilities, insolvency proceedings often lead to the liquidation of the company and it is rare for unsecured debtors to recover their debt.

Download the entire collection complexity PDF:

Collection complexity Spain 981 KB

LATEST NEWS ABOUT SPAIN

Contacts

 
Euler Hermes Economic Research
research@eulerhermes.com
Georges Dib
Economist for Latin America, Spain and Portugal
georges.dib@eulerhermes.com

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