At the beginning of the year it was expected that the Spanish economy would be able to grow to 1.7%, a figure that had been revised downward, although at the same level of growth as the Eurozone, while the world should have grown at a faster rate than last year. The coronavirus crisis has shattered all expectations of growth and review after review we are seeing that the Spanish economy is sinking.
In the latest IMF report, the recession has been revised and it is seen by a greater intensity in the recession. Growth in the advanced economies group is forecast to be -8% in 2020, which represents 1.9 percentage points less than in the April review.
It appears that in the first half of the year activity has been more affected than initially anticipated, with signs of voluntary distancing even before closures were imposed. This also suggests a more gradual recovery in the second half, as the fear of contagion is likely to continue and hence the deterioration in expectations. Synchronized deep declines are anticipated in the United States (-8%), Japan (-5.8%), the United Kingdom (-10.2%), Germany (-7.8%), France (-12.5 %) e Italy and Spain leading the recession (-12.8%).
Spain has gone from leading the growth of the Eurozone in recent years to being the ballast of the group. Because the eurozone is expected to drop 10.2%, if the forecasts are met, Spain would add a negative growth rate of 2.6 percentage points.
It is a historical fall, never seen before, but the IMF is not the only body that projects this collapse in the Spanish economy, AIReF and the Bank of Spain are also on the same line. For AIrReF, in the least adverse scenario, GDP would fall 8.9% in 2020 and the most adverse scenario the fall would reach 11.7%.
The BdE works three scenarios. In the event of an early recovery, GDP would fall by 9% this year, but if the recovery were gradual, the expected drop would be 11.6%. However, the BdE dares with a third scenario, in which the recovery would take place at a very slow pace and the decrease in GDP would amount to 15.1%, the worst forecast to date.
Because there is high uncertainty about the evolution of the pandemic and what the impact on the economy will be, the agencies make very abrupt reviews quarter by quarter and establish different intensity scenarios, so macro tables are more difficult to draw today than ever.
Deficit and skyrocketing debt
The other big topic to discuss will be what level of deficit do public administrations reach this year. Their accounts already had some considerable mismatches before the Covid-19 epidemic. After four years of declines, the deficit increased to 2.8% of GDP in 2019.
Everything seems to indicate that we will have a record deficit, above 10%. The valuation made by the IMF is that we will reach a deficit of 13.9% that would lead us to a public debt of 123.8% of GDP when the year ends.
If we contrast these data, they would be significantly above the Eurozone (11.7%) but lower than that of the advanced economies as a whole (16.6%). Here we must bear in mind that the projection established for the United States is a deficit of 23.8% for this year, a figure that might seem like it might have intended its public debt, but remember that very well under the dollar pattern and the strong demand for dollars on a global scale, makes US bonds the safe haven to give profitability to those dollars.
Regarding public debt, if the forecasts are fulfilled, public debt would be above both the projection for the Eurozone (105.1%) but lower than global advanced economies, which is expected to reach 131.2%.
On the evolution of public debt, we start from a ratio of 95.5% of GDP, so we would add 28.3 points of public debt in a year. At this point it must be borne in mind that not only i, carries the high deficit this year but that there will be a collapse in Spanish GDP, so the ratios linked to GDP suffer especially from the deterioration of the denominator.
For AIReF, the least adverse scenario that can be assimilated to that of the Stability Program Update, the general government deficit would stand at 10.9% of GDP in 2020. In a more adverse scenario in which confinement is prolonged, the 2020 deficit would stand at 13.8% of GDP.
El BdE ya has dared to make projections for the entire decade. As can be seen in the graph, in the early and gradual recovery scenarios, there would be a gradual increase in the public debt ratio throughout the decade, until reaching, in 2030, around 115% and 125% of GDP in either case. This increase in indebtedness during the period considered is due to the fact that the growth of nominal GDP is not high enough to compensate for the high primary deficit that is registered year after year.
For this reason, the Governor of the Bank of Spain, Pablo Hernández de Cos, has transferred to the Congress of Deputies the urgent need for a fiscal consolidation exercise for the next decade, based on a tax increase and a containment of public spending, to try to turn this ratio upward path.
According to his vision, it is necessary to tighten via taxes and there would be a margin of two percentage points to increase the collection, especially tightening indirect taxes. In addition, it has been especially critical of the high level of tax benefits, pointing to exemptions, deductions and reduced special rates, which frequently generate significant losses in collection and distort the efficiency and fairness of the tax system.