RaboResearch - Economic Research

Third COVID wave will push Spain’s economy into another recession

Economic Report

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  • Spain is in the midst of a third coronavirus wave
  • Regions have already toughened containment measures, although measures still fall short of the full-fledged lockdown in the spring
  • The national government hopes that a return to that scenario can be averted
  • We think Spain’s economy contracted in the final quarter of last year and pencil in another contraction in the current quarter
  • From the second quarter there will be room for recovery
  • Yet according to our calculations it could take until 2024 before GDP returns to its pre-crisis level

Health situation has deteriorated rapidly

Spain, like many other European countries, is in the midst of a third coronavirus wave, even before the second one was actually over (figure 1). The new incidence rate has been increasing rapidly since early January, following the holiday season. By 21 January, the 14-day cumulative number of new cases per 100.000 habitants had risen to 804 (ECDC) and to over a 1000 in some regions. To put things into perspective, the peak in the second wave early November was 602 and in the first it was 215 – although during the first wave many cases likely remained undetected. Accordingly, the country has been a high risk - red - region for six subsequent months according to the thresholds of de ECDC. Going forward, the outlook is worrying, given that both the number of tests being carried out and the share of positive results have continued to rise since Christmas (figure 2). Meanwhile the situation in hospitals is deteriorating and already alarming in several regions.

Figure 1: Spain in the midst of a heavy third wave
Figure 1: Spain in the midst of a heavy third waveSource: Macrobond, ECDC, RaboResearch
Figure 2: Testing and positivity rates signal notification rate will rise further
Figure 2: Testing and positivity rates signal notification rate will rise furtherSource: Macrobond, RaboResearch

Authorities tighten containment measures

In Spain, regional authorities are in charge of containment measures and nearly all of them have already announced tougher measures. Measures include perimeter lockdowns – restricting traffic in and out the region or even municipalities – and limited opening hours or even closure of non-essential shops and hospitality venues. In some municipalities, provinces and regions measures come very close to the strict lockdown imposed in Spring, only falling short of confining people to their homes. The latter does not yet fall under the authority of regional administrations. They have requested the national government to give them such powers, but the thinking – or is it hope - of the national government is that like in the second wave the curve can be bend again without having to resort to a full nationwide lockdown.

In any case, to us it is clear that economic activity will be significantly dampened by the third wave and subsequent containment measures. Both by the measures implemented at home and abroad in important trading partners such as the UK, Germany and France. Against this backdrop we pencil in another contraction in the first quarter of the year, pushing Spain into another recession, i.e. two subsequent quarters of shrinking economic activity.

The second wave halted the economic recovery

Although we will have to wait until the end of the month for the official GDP figure for the final quarter of last year, timely activity indicators suggest the economy contracted. Based on available monthly data and the containment measures that were in place (figures 3, 4, 5 and 6), we pencil in a contraction of around 2% q/q. The contraction follows large losses in Q1 and Q2 and only a partial recovery in Q3 (-5.2% q/q, -17.9% q/q, and +16.4% q/q, respectively). The PMI figures in figure 3 show that while manufacturing activity remained more or less constant, activity in the services sector took another hit in the fourth quarter. Available turnover and production data for the start of Q4 show weakness in especially the hospitality sector and car sales (figure 4), while retail trade and industrial production on average remained broadly at Q3 levels – which is still several percentage points below the levels one year ago, though. The strong monthly increase in car registrations in December suggests that December was not that bad a month after all, but the uptick fails to compensate weak activity in October and November.

Figure 3: Q4 PMIs show service sector activity shrank, while manufacturing output stabilized…
Figure 3: Q4 PMIs show service sector activity shrank, while manufacturing output stabilized…Source: Macrobond, RaboResearch
Figure 4: Within the services sector, retail trade outperforms the hospitality sector and car sales
Figure 4: Within the services sector, retail trade outperforms the hospitality sector and car salesSource: Macrobond, RaboResearch

Although large, the GDP shock in Q4 was clearly less severe than that in Q2. This results from a combination of factors. First, domestic containment measures were less strict (figures 5 and 6). The government tightened containment measures over the course of the quarter, but shied away from a full nationwide lockdown as seen in spring. In most Spanish regions hospitality venues faced tougher capacity constraints and more limited opening hours than in summer, but only some regions temporarily shut the doors of non-essential shops and hospitality venues. Second, the external environment was less weak, with fewer countries in lockdown. Third, the supply chain disruptions that severely hampered manufacturing production in Q2 had largely faded at the start of Q3, benefitting industrial production. Fourth, the decline in activity was also smaller because Q4 already started at a lower level of activity than Q2.

Figure 5: Mobility dropped substantially, but less than in Q2
Figure 5: Mobility dropped substantially, but less than in Q2Source: Macrobond, RaboResearch
Figure 6: Containment measures were tightened over Q4, but remained below Q2 highs
Figure 6: Containment measures were tightened over Q4, but remained below Q2 highsSource: Macrobond, RaboResearch

Vaccinations to provide relief, but it will take time

On the upside, Spain has started to vaccinate elderly and nurses in elderly homes, among others. While so far progress in several regions has been very weak, we think vaccinations will support a gradual loosening of containment measures from the end of Q1 onwards. This should pave the way for some economic recovery thereafter. That said, we expect that it will take until mid-2021 before the economy will return to GDP levels seen in 2020Q3 and even until 2024 before the pre-crisis peak of 2019Q4 will be reached (figure 7). Our rather pessimistic view results from the expectation that it will take time before a sufficiently large part of the population is inoculated such that all containment measures can be removed and from the thinking that despite all the government support, bankruptcies and unemployment will increase once government support is being wind down – as explained in a previous report. Moreover, losses in some hard-hit sectors such as tourism will take time to recover, holding back employment growth and investment in these sectors. Tourists will not simply catch-up all lost vacations at once. Given the sector’s share in the economy (14% of GDP), this hampers the economy’s return to pre-crisis levels.

All in all, we expect the economy to grow with about 4.5% this year, after having contracted by 11.5% last year (figure 8).We forecast unemployment (16.9% in December 2020) to average 18.5% in 2021 and 18% in 2022.

Figure 7: We expect it will take until mid-2021 before the economy has recovered the losses of 20Q4 and 21Q1
Figure 7: We expect it will take until mid-2021 before the economy has recovered the losses of 20Q4 and 21Q1Source: Macrobond, Rabobank
Figure 8: GDP growth in 2021 will be largely insufficient to recover 2020 losses
Figure 8: GDP growth in 2021 will be largely insufficient to recover 2020 lossesSource: Macrobond, Rabobank
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