Spain’s outlook for pandemic recovery: Areas of outperformance and pending challenges

Spain’s outlook for pandemic recovery: Areas of outperformance and pending challenges

Fecha: july 2021
SEFO, Spanish and International Economic & Financial Outlook, V. 10 N.º 4 (July 2021)

Index

The Spanish economy in recovery mode: Opportunities and challenges

Recent indicators point to a vigorous economic recovery for Spain, with GDP set to grow by 6.3% this year despite rising infection rates, supply chain bottlenecks and a slower than anticipated return of tourists. The challenge is to maintain the expansionary phase, which involves implementing the reforms foreseen in Next Generation EU and tackling the legacy of unemployment and public debt.

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COVID-19 and its asymmetric impact in Spain by province: Recent trends and projections

The COVID-19 crisis in Spain has been marked by a triple asymmetrical impact in terms of timing, sector and region. While those sectors and regions hardest hit by the crisis should post strong growth, the recovery will likely be characterised by disparity across sectors and regions in Spain.

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Forbearance patterns at Spanish banks: Impact of COVID-19

Government support measures such as the furlough scheme and payment moratoria have artificially held down a rise in Spanish banks’ NPL ratios. However, recent trends in forborne exposures relative to Spain’s previous performance and that of the eurozone average suggest NPLs could rise once these measures expire.

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Decoupling between non-performance and provisions

Surprisingly, Spain saw its banks’ non-performance ratio fall during the crisis alongside a significant provisioning effort. However, if banks are to absorb their pandemic-related losses by the end of 2022, they will need to step up their provisioning by 20-25% compared to 1Q2021 levels.

The Spanish housing market post COVID-19

While COVID-19 did lead to an initial correction in Spain’s housing market, costs of home purchases have continued to rise, albeit with some differences across regions and type of housing. This has furthered a debate around housing affordability, including some misguided calls for rent controls.

The outlook for the deficit: The calm before the storm

It will require a concerted effort to bring down Spain’s deficit and debt levels, involving higher annual reductions than those prior to the pandemic. However, it is not just the central government which needs to address this issue, with many regional governments facing financial challenges ahead.

Institutional reforms: A source of productivity gains for the Spanish economy

Spain’s declining total factor productivity is partially attributed to institutional weaknesses in areas such as transparency, the justice system, regulation, and government coordination. If left unaddressed, it could undermine Spain’s successful transition to the digital/green economy.

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