The Spanish economy will struggle to recover from the impact of the coronavirus pandemic to such an extent that it will still be up to 6% smaller at the end of 2022 than it was before the crisis does strike, according to the Bank of Spain.
In a grim set of economic projections released on Wednesday, the central bank highlighted the destructive impact of both the initial coronavirus outbreak and the resurgence in infection rates after the country’s lockdown ended in June.
Spain’s economy contracted a record 18.5% in the second quarter of this year compared to the previous three months, after contracting 5.2% in the first quarter.
The central bank expects a rebound of between 13 and 16.6% in the third quarter. But he noted that what appeared to be a relatively strong economic recovery, following the easing of restrictions, slowed compared to July with the resurgence of the virus, with some indicators falling in August.
The bank presented two sets of forecasts, depending on the course of the pandemic, and noted the high degree of uncertainty about the potential outcome.
In the first scenario, in which economic activity would be less constrained by anti-virus restrictions, gross domestic product would contract by 10.5% this year, with a limited recovery over the next two years, leaving GDP 2 % below 2019 levels by 2022.
In a more pessimistic scenario, GDP would decline by 12.6% this year and remain slightly 6% below 2019 levels in 2022.
Both scenarios assume that measures to restrict the spread of the virus would be lifted in the middle of next year as a vaccine or other treatment becomes available.
The pandemic has hit Spain harder than most countries in Europe, both in human and economic terms. Spain’s infection rates are much higher than any other country in Europe. Madrid, one of the main engines of the Spanish economy, is also the most affected region and is expected to announce new restrictions in the coming days.
Spain’s exceptionally high dependence on tourism, the dysfunctional labor market, in which around a quarter of all workers are on temporary contracts, and the predominance of small businesses, which may lack the resources to withstanding a severe recession, are all factors that have contributed to the economic damage.
When temporary leave schemes and bans on dismissing workers expire, Spain’s unemployment rate would increase in the worst-case scenario to 22.1% next year before falling back slightly to 20.2% in 2022, said the central bank, while debt as a percentage of GDP will drop from 95.5% at the end of 2019 to 128.7% in 2022.
But his calculations did not take into account the EU’s € 750 billion coronavirus recovery fund, which Spain expects to receive € 140 billion in grants and loans. The timing, nature and efficiency of the country’s use of this money had not yet been determined, the bank said. He also warned of the potential negative economic impact of a no-deal Brexit and trade tensions between the United States and China.