The Home of Investment Banking

Is Spain Heading Towards Economic Recovery?


In the post-COVID race for recovery, Spain has been noticeably slow out of the starting blocks. Whilst its EU neighbours have surged ahead, Spain legs far behind. Whilst Spain may have overcome a virological crisis, an economic challenge may materialise in its wake.

Indeed, as of the end of the third quarter of this year, France’s GDP was just 0.1% below end of 2019 levels. Italy and Germany showed rates of 1.4% and 1.1% respectively. Meanwhile, Spain’s economic recovery is alarmingly slow. Its GDP languishes at 6.6%, below pre-COVID rates. Its inflation rates currently sit at 5.5% – constituting a 30 year-high.

A reference to history is important here, for COVID-19 has illuminated and exacerbated the state of the nation.

From one crisis to the next: Spain’s pre-COVID economic performance

Indeed, since its incorporation into the Eurozone in 1999, the Spanish economy has limped towards progress. The years 2000 to 2007 saw a period of impressive growth; with unemployment dropping to 7.6%, rapid growth rates and a drastic reduction in income inequality which made Spain one of the strongest EU economies.

As apartments and houses were erected, immigration swelled the labour force and new service-industry jobs emerged, Spain’s economic future looked promising.

Yet, as recent history has made us aware, no period of steady progress is complete without a crisis of some form. The 2008 Financial Crisis brought with it the European sovereign debt crisis, with dramatic effects on the Spanish economy.

As the fifth member of the ‘PIIGS’ quintet, Spain recorded an unemployment rate of 24.4% in March 2012 – a rate almost as high as during the 1929 Great Depression in the U.S.A. Spain also experienced a collapse to the property market, a spiralling of government debt and consequently, recession.

Salt in the wounds: how COVID-19 has highlighted Spain’s economic weaknesses

Curiously, Spain has recorded one of Europe’s lowest rates of COVID-19 infection, yet it is one of the virus’ greatest economic sufferers. But what can explain these economic trends?

Source: IMF

Firstly, household consumption has taken a toll since March 2020. From the final quarter of 2019 to the second quarter of 2020, household consumption fell by 30%. Household savings in 2020 are 8% greater than 2019 levels. It appears as though a precarious labour market rife with temporary work, especially for young workers, offers little hope of short-term economic relief.

Secondly, the pandemic has illuminated Spain’s heavy reliance on tourism. As the second-most visited country globally, tourist-related industries constitute 12% of the Spanish GDP (2019). However, the COVID-19 pandemic has decimated the health of Spanish hotels, restaurants and transport-related business.

Thirdly, supply-chain issues act as stumbling blocks to Spain’s economic resurgence. The resurrection of Spain’s greatest export, its automobile industry (valued at US$34 billion), was stalled by bottlenecks in the production network. And this largely slowed Spain’s economic recovery.

Moreover, whilst optimism looms over the prospect of the EU recovery fund to mitigate the pandemic’s damage, its associated benefits have yet to be realised. After receiving €9 billion in August, Spain became the first EU member state to request the first instalment of €10 billion.

However, delays in accessing the capital have thwarted rates of private and government investment. Any meaningful growth would thus begin starting 2022.

What’s next for Spain?

If COVID-19 becomes a thing of the past, Spain’s tourism and automobile sector are likely to enjoy a return to, or improvement of, pre-pandemic conditions. Already, the country looks set to enjoy the boost from the EU’s recovery fund.

Nevertheless, underlying current trends: a heavy reliance on the automobile and tourism industry and high rates of inflation, unemployment, and the rise of the Omicron variant may pose a threat to Spain’s economic recovery on the long-term.

Indeed, crises always produce unintended effects. Spain must hope that it can make the next decade a period of outstanding growth, just as the 1918 ‘Spanish Flu’ transitioned into the ‘Roaring Twenties’.

However, anyone familiar with the contours of history must know that crises are always around the corner. Without a fundamental restructuring of its economic blind-spots, Spain’s next crisis may be more destructive than its forerunners.

More Articles