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Íñigo Fernández de Mesa and Gregorio Izquierdo, President and CEO of the IEE, respectively, presented the semi-annual Economic Situation Report ‘COVID-19 crisis in the Spanish economy: recovery is not possible without business confidence.’ The Report indicates that the global economic recession is a joint crisis of supply and demand, and therefore especially complex, that needs solutions from both perspectives and dimensions. On the one hand, the demand crisis, with the consequent loss of activity and income, was the most visible and urgent, and attempts have been made to alleviate strong monetary and fiscal expansions. And on the other, the supply crisis, which is less visible but more important, because it affects the production possibilities of companies, and which remains largely unresolved, as the restrictions on activity continue, the price increases of operating costs and the losses suffered must be recovered.

Therefore, the recovery will be, unfortunately, more uncertain and slower than the fall. His departure is subject to strong uncertainties, including the final resolution of the health problem, which conditions normalization. On the other hand, as a consequence of the policies implemented, we are accumulating even greater imbalances of debt (fiscal policy) and excess liquidity (monetary policy), which can condition the effectiveness of these demand policies and, therefore, the speed of recovery. And finally, despite these extraordinary stimuli, the exit is still not guaranteed, since, in the face of a double crisis of demand and supply, this political response based more on demand or expense than on supply or production possibilities, may be useful to stabilize the economy but insufficient, just look at the statistics already known of the disappearance of companies and those that we will see in the coming quarters of losses suffered, with the consequent deterioration of solvency and business confidence that inevitably slows down the pace of recovery .

The Spanish economy with COVID-19

Spain has been one of the countries most affected by the COVID-19 crisis for several reasons: for our productive structure, with service and proximity sectors that are most affected (tourism, hospitality, commerce, transport), for the greater weight of the small company with less capacity to overcome this crisis; for our greater confinement and duration of restrictions; and due to our lesser economic freedom and freedom of company, this is understood as greater rigidities and burdens to be able to adapt to the new situation and that materialize, mainly, in greater rigidities in our labor market and a smaller margin of maneuver for fiscal policy .

In this way, the IEE estimates that the Spanish economy will contract 11% in 2020, that is, thirteen percentage points less than the variation experienced in the previous year, recovering only partially in 2021, where the growth of production is will set at 5.5%. This crisis would also have a negative effect on the evolution of the labor market. The application of the ERTE has made it possible to lessen the impact on employment, but, despite this, a significant rise in our unemployment rate is expected, by 2020, of up to 20.5% and 22% in 2021.

The evolution of inflation over the next two years will be determined by weak demand, by the low level of use of productive capacity, as well as by the evolution of the energy price component. The CPI is sunk by the serious situation we are experiencing, with the annual variation remaining null this year and rebounding to 1.2% in 2021.

Regarding the increase in public spending, motivated by the effects of the crisis (health spending and unemployment benefits), as well as the increase in structural spending, the IEE expects the public deficit to stand at 11.5% at present exercise and to decrease to 7.5% in 2021.

IEE recommendations on economic policy

In a context where our public debt and our external debt are already very high, the last thing we need is to fuel a climate of uncertainty (institutional, political or economic) that causes not only that we do not attract the necessary capital, but also a flight from now existing, and that would be transferred to our risk premium in the form of a strong increase and would also weigh down the financing of our private sector, in one of the manifestations of the famous expulsion effect.

The IEE stresses that the path to budgetary consolidation is in the efficiency of spending and not in tax increases, since it would be the worst decision that the Government can make at this time. An increase in taxes would mean delaying, if not impossible, the possibilities of recovery of our country, depressing the productive offer and consumption, just the opposite of what we need, and deteriorating the expectations of the agents regarding the credibility of the public accounts, causing a degradation of confidence, which is the fundamental pillar on which to support recovery.

The only way to sustainably increase our tax collection is to prioritize economic recovery and reduce our shadow economy, which is materially impossible if we further raise our taxes. Thus, trying to close the collection gap with Europe by raising tax regulations of up to six points on GDP, would not solve the problem of fiscal sustainability in the medium term, since they could cause a contraction in activity of up to 10 GDP points and a destruction of the order of 2 million jobs.

Lastly, it should be noted that the arrival of the European reconstruction funds is going to be a historic opportunity, so we must try to reach those activities with the greatest potential for recovery and that can serve as a lever for the rest of the economy: either because They are the ones that have suffered the most, due to their relatively stronger position, because they have a greater drag effect or because they coincide with those determined as priorities by the European Commission itself, such as, for example, the ecological transition or digitization.



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