RaboResearch - Economic Research

Spain’s economic recovery gradually gains ground after a weak start to the year

Economic Update

  • Spain is facing the start of a fourth wave of COVID infections, with worrying ICU occupancy rates in several regions
  • The still worrying health situation will prevent a rapid return to normal
  • Yet we foresee some easing of containment measures over the course of the quarter and a grand reopening in the second half of the year
  • After a contraction in Q1, we project subdued economic growth in Q2 and a pronounced recovery in the second half of the year
  • Still we expect it will take until mid-2023 before GDP will reach its pre-COVID level, helped by the EU recovery fund
  • In an alternative scenario in which the grand reopening of the economy is postponed to beyond the summer, full recovery is delayed by approximately one year 

Ups and downs, and ups?

Spain is facing the start of a fourth wave of COVID infections. After having suppressed its third wave of COVID-infections over the course of Q1, new infections have started to rise again since mid-March (figure 1). Over the 14 days up to 22 April, 247 out of 100,000 inhabitants tested positive. While that is still rather muted when compared to many European peers, it has pushed most of Spain’s regions into the high risk basket. Moreover, the COVID occupancy rate at ICUs has also started to increase from an already high level at the trough (figure 1) – albeit with large variations among regions (figure 1). Going forward, certain containment measures will likely be prolonged, but it remains to be seen if regional authorities, who are largely in charge, will again tighten restrictions. More specifically, with regional elections coming up 4 May, especially the rebellious region of Madrid is likely to continue to impose relatively soft constraints in comparison to its high-risk health situation. Meanwhile, when the national emergency situation expires on 9 May, regional authorities will no longer have the power to implement curfews and certain other mobility restrictions. Several regions have asked for the emergency powers to be extended, but the national government has so far been unwilling to put that to a vote.

All in all, the health outlook remains uncertain. We will have to wait to see if Spain’s rather bumpy fight against the virus will ultimately prolong the need for containment measures, hindering the recovery of crisis losses. Or if its relatively mild measures when compared to the health situation combined with vaccinations gaining ground will speed up the recovery sooner rather than later.

Figure 1: Fourth wave is taking shape…
Figure 1: Fourth wave is taking shape…Note: >15% advise to close indoor dining and bars, >25% is high risk Source: Macrobond, WHO, Ministry of Health, RaboResearch
Figure 2: Will it prolong Q1’s weakness?
Figure 2: Will it prolong Q1’s weakness?Note: *Visitors retail & recreation is difference with avg. pre-corona week Source: Macrobond, Google mobility data, RaboResearch

Growth to pick up after Q1 contraction, but full recovery takes time

The first quarter’s GDP figure will be published on 30 April. Based on available sales, production and recreation data (figure 2), we expect GDP to have contracted in Q1 by slightly less than 1% q/q. Going forward, the still worrying health situation, combined with too few people vaccinated (24% at least one shot, 9% fully vaccinated) – due to vaccine delivery delays and concerns over side effects – will prevent a rapid reopening of the economy. Yet we foresee some easing over the course of the quarter, with containment measures largely being removed in the second half of the year, in line with the vaccination drive gaining speed. Based on current delivery projections, Spain can have inoculated its over-30s with at least one shot by July. It is also still positioned to reach its target of having fully vaccinated 70% by the end of summer - depending on what it decides on the use of the J&J vaccine. Reopening of the economy would give a boost to tourism, hospitality, employment and likely some pent-up demand - limitations for the latter are discussed below.

Meanwhile, we have already seen a very strong recovery of activity in the manufacturing sector towards the end of Q1 (figure 3) and we expect it to proceed in the coming months, on the back of improving world trade and specifically improving activity in important trading partners. That said, certain important production sectors for Spain are expected to be slowed down by the global shortage of semi-conductor chips, such as Spain’s large automotive sector. Lengthened delivery times and increasing input costs pose other risks to the manufacturing sector’s outlook –consumer price inflation has also started to rise, possibly hampering the recovery of demand.

Figure 3: Will manufacturing maintain its pace?
Figure 3: Will manufacturing maintain its pace?Source: Macrobond, RaboResearch
Figure 4: Complete labor recovery takes time
Figure 4: Complete labor recovery takes timeSource: Macrobond, RaboResearch

Against this background, we foresee subdued growth in Q2 and a pronounced recovery in the second half of the year. Thereafter, the recovery will advance at a more muted pace. Owing to government support fewer firms went bankrupt (-14%) or were dissolved pre-emptively (-13%) in 2020 than in 2019, when the economy was growing. Thus a rise in liquidations can be expected once the government starts to wind down support. In any case, deteriorated balance sheets of businesses in hard-hit sectors will likely hold back employment and investment as firms will need time to recoup. Therefore we expect it to take time for the labour market and households’ disposable income to recover (figures 5 and 6). Additionally, the distribution of lost income and increased savings suggest consumption will rebound more slowly. Specifically, it low-income workers with a high propensity to consume have suffered more from income losses over the past year, while mostly the wealthier population with a lower propensity to consume has accumulated savings (see Banco de España Economic Bulletin box 4 and this Monthly’s Eurozone section). Finally, the relatively important tourism and hospitality sector have a more limited potential for pent-up demand.

All in all, in our baseline, we expect the economy to reach its pre-crisis level by mid-2023, helped by the EU recovery fund. According to our preliminary estimates the fund will lift Spain’s GDP by about 1.5% from 2021 until 2023. Our baseline hinges on the assumption that inoculation advances in such a way that Spain can largely reopen in summer and enjoy a decent tourism season. If reopening is delayed by one quarter, we expect the recovery to pre-COVID levels to be delayed by approximately one year, as the important summer season goes lost (figure 6). 

Figure 5: Saving rate rises, but income drops 3%
Figure 5: Saving rate rises, but income drops 3%Source: Macrobond, RaboResearch
Figure 6: Vaccination speed is key to recovery
Figure 6: Vaccination speed is key to recoverySource: RaboResearch

Return to pre-COVID in 2023, with some help from the RRF

Between 2021 and 2026, Spain is entitled to approximately EUR 70bn in grants (some 6% of 2020 GDP). Yet it is unlikely it will absorb all and for sure not in the short term. Spain has a relatively weak track record of absorbing European Structural investment funds from the EU budget (ESIF). From the EU 2014 – 2020 budget it has so far only absorbed 50% of what it is entitled to. Furthermore, the grants component from the recovery fund is almost twice the amount of money it had to absorb in ESIF from the EU budget 2014 -2020. Finally, Spain will not only have to show it uses the money to the wishes of the European Commission, it also has to implement reforms in return, which generally are not easy. At the same time, the major need and possibilities to put the money to good use, support the uptake in our view. Moreover, Spain has shown great decisiveness in the past when it comes to pushing through reforms if demanded (during/ after the global financial and Eurozone debt crisis). Against this background, we have projected Spain to absorb around 25% of the funds in the coming three years and used a multiplier of 0.9 in the initial years. The multiplier is likely to grow in the medium term. For argumentation on the multiplier please see The economic impact of the EU recovery fund.


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