Beyond European funds: the Spanish economy needs the boost of structural reforms

Íñigo Fernández de Mesa and Gregorio Izquierdo, president and general director of the IEE, respectively, have presented the semiannual Report on Economic Situation "Beyond European funds: the Spanish economy needs the boost of structural reforms." The Report indicates that this year, 2020, will go down in history as the one in which there has been the greatest economic debacle ever recorded in terms of a drop in productive activity and it is expected that the economic evolution during the next year still conditioned by the containment measures and the pandemic, as well as by the expansion and effectiveness of the population vaccination campaigns.

For 2021, an economic recovery is expected in the main countries, but at different speeds, with major sectoral differences and with notable downside risks conditioned by the possible “new waves” of the pandemic. However, it should be noted that the economic recovery will be supported by macroeconomic policies. The monetary policy carried out by the main central banks will be maintained in ultra-expansive terms and will support a liquidity provision that guarantees that financial resources are sufficient to meet the needs of productive activity and public debt, minimizing, in turn, the risk of insolvency. Regarding fiscal policy, it will also maintain an expansionary component.

The forecast economic scenario for next year, characterized by high uncertainty, has opened up new “Schumpeterian” opportunities through technological innovations (digitization, ecological and energy transition, health, telework, education and training, among others). In this sense, the Report highlights three components that could determine the recovery and growth pattern of the world economy in the coming years. In the first place, the degree of compliance with the current provisions will depend, to a large extent, apart from health management, the degree of openness of economies and free trade, the free international mobility of capital and people. Secondly, a considerable effort is being made by the EU to improve its competitiveness through an ambitious investment plan and structural reforms that boost productivity growth and, therefore, the potential of the whole of the economy. And, finally, the high levels of public indebtedness reached due to the pandemic by a significant group of countries should be highlighted.

Macroeconomic forecasts for Spain

Spain has been one of the countries most affected by the pandemic. Looking ahead to the fourth quarter, with the increase in outbreaks and the return to restrictions in some municipalities or regions, although these are being much softer and more localized than in the first wave (mobility is at levels similar to those reached in June), the increase in GDP will be very slight and even a relapse in GDP compared to the third is not ruled out. In fact, after the strong rebound in the economy in the third quarter, after the restrictions were lifted, the indicators available since then have shown a certain exhaustion of their momentum, as a result the economic forecasts of the Institute of Economic Studies, for 2020, advance a contraction of the Spanish economy of -11.3% in 2020, that is, fourteen percentage points less than the variation experienced in the previous year. For 20121 a partial recovery is expected as GDP growth is estimated at 6.0%. It should be noted that, in any case, the economic reactivation will be very gradual and the pre-crisis GDP levels will not recover until early 2023.

The contraction in national demand (-10.2%), in particular, that led by private consumption (-13.8%) and by investment in fixed capital (-16%) will be the main determinants of the evolution of production during the current year, although the foreign sector will also show a negative contribution to growth (-1.1 pp), mainly due to the fall in income from tourism and the weakness of the automotive industry, that will weigh on exports.

Regarding the evolution of the labor market, despite the fact that the application of the ERTE has made it possible to reduce, to a large extent, the impact on employment (-7.7%) of the fall in activity in 2020, during the next This year there will not be such intense growth in job creation (2.9%), among other reasons because ERTE workers who return to activity will not be recorded as an increase in employment and companies are operating below their productive activity. In addition, the crisis may have a more lasting effect on the labor market, both due to the destruction of part of the productive fabric and the rigidities of labor regulations and the low qualification of the workers most affected by it, which would cause the rate of Unemployment continued to increase in 2021, around two percentage points with respect to that registered in the previous period, standing at levels close to 19%.

Inflation in 2020 has been greatly affected by the evolution of oil and the weakness of domestic demand, which has kept core inflation very moderate, which has resulted in negative inflation since April and which will average slightly negative for the whole year. In 2021, core inflation is expected to register somewhat higher growth, although still very contained, which, together with the base effect in the prices of energy products, will cause headline inflation to show a gradual increase to 0.8% of average in 2021.

According to IEE forecasts, the public deficit would be around -13% of GDP in 2020, due to the increase in healthcare spending and benefits to households and the significant deterioration in public income derived from the loss of income and employment. In 2021, it is estimated that it will continue at high levels to -9.5% conditioned by the structural increases in spending in recent years. Also, at a time of crisis, they are betting on untimely and counterproductive tax increases that fall on companies and that will weigh down the recovery. In this sense, the structural public deficit will continue to be one of the largest in Europe, which compromises the credibility of the sustainability of our already high public debt for the future.

Challenges and reforms

The main challenges for the Spanish economy for 2021 will be, on the one hand, that debt and deficit levels do not increase with the same intensity as in 2020 and that adequate use of funds from the Union is carried out European. In this sense, it must be taken into account that a delay in the arrival of funds or an inappropriate use of them will have a negative impact on the expected growth. On the other hand, it would be necessary to avoid the adoption of policies and measures that are an obstacle to the recovery of activity, or that make it even more difficult for viable companies to survive, since they would compromise growth in 2021 and in the years to come.

The IEE calls for the necessary structural reforms to be brought together to help raise our potential growth, both in the short and in the medium and long term, which must be addressed, both from the macroeconomic aspect and at the level of the productive structure and business tissue. From the economic point of view, it is worth highlighting some imbalances that are not new, but which have worsened after the crisis, such as the high unemployment rate, the budgetary consolidation, including the sustainability of the pension system and the low growth of the productivity. From a micro point of view, it is necessary to increase business size, gain competitiveness, improve the business climate and confront the structural changes that lie ahead, such as digitization and environmental sustainability.

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