Spain becomes the biggest drag on the European recovery

The winds continue to blow against the Spanish economy. Its recovery this year is once again lagging far behind when compared to that of its eurozone neighbors. At the end of the day, GDP is still 6.5% below pre-pandemic levels, a gap that Capital Economics determines the weight of the tourism sector and the weakness of domestic consumption in our country.

However, Portugal and Greece, which are even more dependent on tourism than Spain have recovered more fully. Our Portuguese neighbor consolidates its recovery despite registering a tourist season just as poor as the Spanish one, while, according to Jessica Hinds, economist for Europe at this analysis house, “Greece recovered its pre-pandemic size in the second quarter.”

Spain, in the queue

In the case of Spain, the momentum is waiting and as already indicated to elEconomista, Petya Koeva Brooks, the deputy director of the Research Department of the International Monetary Fund, will not arrive until the third quarter of next year. All this at the expense of the investment promoted by European funds materializing, which according to the multilateral organization will contribute 0.7 percentage points to the economic progress of our country in 2022.

That said, the Spanish economy will be the one with the highest unemployment rate next year among advanced economies, with countries like Greece reducing unemployment at a much faster rate. In 2022, the Hellenic country will have an unemployment rate of 14.6%, compared to 14.8% in Spain and will have reduced its unemployment by 1.8 points since 2020, almost double that in the Spanish case. In the medium term, it seems difficult for the labor market to make great progress as the IMF projects that GDP growth will gradually decline to 1.5% in 2026.

Spain continues 6.5% below its pre-Covid level, according to Capital Economics

The detailed breakdown of Spain’s GDP carried out by Capital Economics shows that tourism revenue has performed much worse than exports of other services, recovering only 50% of its level at the end of 2019 in the third quarter. This corresponds to the monthly data on international tourist arrivals and spending. There are other factors at play as well. The gap of 6.5% of Spain’s GDP in the third quarter of this year in relation to the fourth quarter of 2019 by expenditure components confirms that it is not a direct hit from tourism. “The drag on net trade is similar to that on investment, while household spending is the biggest culprit,” Hinds notes.

Tourism and consumption slow down the Spanish economy but not the Greek or Portuguese

Investment in Spain has stagnated since the third quarter of 2020 while it has increased in other countries, such as France, which according to Capital Economics, almost returned to its pre-Covid-19 level in the third quarter. This is explained by the weakness of investment in housing and investment in transport equipment. At the same time, Spanish household spending has recovered much less than in other countries and is still 8.5% below pre-pandemic levels. Part of this is explained by the lag in the recovery of the Spanish labor market and gross disposable income.

In these circumstances, “the government’s forecast of a GDP growth of 6.5% this year seems almost impossible,” they say from Capital Economics, where they mention an expansion of 4.5 or 5% as much more feasible goals. Your economist for Europe projects that next year the Spanish economy is likely to do better. Tourism should return to normal levels and the supply shortage that hinders industry and construction should also ease. The impact of next generation EU funds will also start to show. “We maintain our growth forecast of 6.5% in 2022. But the economy will not regain its pre-crisis size until the second half,” insists Hinds.