The drop the Spanish economy is facing due to the coronavirus crisis is much greater than expected just a few weeks ago. It is enough to do a few simple numbers to realize what is coming. According to balance of payments data, foreign tourists in Spain spent some 72,000 million euros last year, and Spanish disbursements for trips abroad accounted for about 24,000. Consequently, the balance in favor of Spain for the tourism sector reached 46,000 million, 4% of GDP. If those inputs were to zero for a year, the economy would lose about four points of GDP. If the drop were 50% for six months, a growth point would vanish. And that is only with tourism.
Spanish household spending on restaurants, leisure, events and other activities exceeds 10% of GDP. If this item suffered a 50% collapse for three months, activity would lose another point of GDP. Only with those two headings down, the economy would already be in recession and would go from growing the 1.6% forecast before the virus to a fall of -0.5%. These are simple static calculations applied to specific games. Private investment would also suffer. And it would be necessary to add the fall of dominoes that it would unleash, also affecting other sectors. The car alone already represents close to 10% of GDP and is undergoing restructuring after two bad years of sales.
Given these figures, it can be argued that later demand could recover and experience the rebound in V that the Government uses. Going ahead of Spain in the crisis, the Chinese economy serves as a benchmark: “With the coronavirus becoming a pandemic, it is simply impossible for China to quickly rebound to full capacity in the second quarter. In other words: the recovery in V, at least a complete one, is ruled out ”, emphasizes Alicia García Herrero, from the French bank Natixis.
In other words, it will be more difficult to get out of the rut by exporting. Although the industry rejoins, global demand may take time to arrive, delaying the recovery.
And in any case, the recovery will not be the same by sector. Tourism will take longer. To the extent that the contagion curve is drawn even worse than that of Italy, the image of Spain as a destination may be harmed beyond the duration of the pandemic. As Francisco Vidal, chief economist at Intermoney, explains, tourism will be affected this campaign because trips are usually planned in time. Countries like the United Kingdom, which is a month behind in the epidemic, or Germany will send fewer tourists, partly because their citizens may have saved less. It will also depend on the airlines being able to maintain their capacity, Vidal concludes.
“The lack of confidence, the loss of employment, the destruction of companies, the adjustments of the companies and the chain of delays in payments to suppliers will make the recovery not 100%,” says economist José Carlos Díez. It seems that the V is moving away. As long as the epidemic peaks in the summer, the S&P rating agency considers the year to be lost and predicts that the Spanish economy will fall 1.8% this year. If employment behaves the same as activity, it would mean the destruction of some 300,000 jobs. Of course, S&P offers a note of optimism: it expects GDP to rebound next year by 3.1%.
For this last forecast to be fulfilled, it is crucial that there are no more accidents. The worst thing that could happen is that a credit restriction was repeated and that the risk premiums shot up again, returning to the situations that existed between 2008 and 2012. How to avoid it? This time the origin of the recession is different from 2008. Monetary policy alone cannot solve the crisis: banks already have plenty of liquidity and rates are negative. Fiscal impulses to use are of little value as long as families are confined. So the recipe governments follow is to take surgical steps to keep businesses afloat and protect household incomes. The call Kurzarbeit it worked for Germany in 2008. And now a similar scheme is being applied in Spain with ERTE (Temporary Employment Regulation Expenditure).
The other front is in the financial sector, which comes with very fair capital. No matter how much liquidity you have, you can close the loan if you see that companies are losing income so they do not have to incur more risks and therefore provision more. Provisioning the expected loss forces entities to raise capital so as not to lose solvency, and that becomes an impossible task with its value sinking in the Stock Market. In fear of this happening, all governments have announced plans for massive guarantees, with the intention of preventing entities from turning off the tap just when companies need cash to finance the stoppage. And states put these guarantees even at the risk of eating up many losses.
In these circumstances, public accounts will run riot. Risk premiums have already started to climb last week. The market put in price that the public coffers of the southern countries will not be able to bear the effort. Hence, the ECB came out to announce that it will support the debt of the States by buying 750,000 million additional to the 350,000 that it had already planned. In total a trillion euros, almost the GDP of Spain and 10% of that of the eurozone. In addition, the Eurobank has temporarily relaxed regulation so that banks do not have to provision right now and thus do not restrict financing.
The missing European solidarity
The ECB will buy debt from states and companies, has provided massive liquidity to entities, and has relaxed its regulatory requirements. He is even willing to temporarily buy more of the country that needs it and not according to the weight of each economy, as he did until now. For their part, the States have put in place plans to contain the damage. But a third leg is missing to close the circle and ensure the response to the crisis: European solidarity. In a tribune published in this newspaper, the Governor of the Bank of Spain, Pablo Hernández de Cos, pointed out this Saturday: “Greater ambition and coordination of the response at European level is not an option; it is a necessity”. Italian Prime Minister Giuseppe Conte has called for the European rescue mechanism (ESM) to use its full firepower to help the countries. They are just over 400,000 million.
This time it is also a shock supervening, not from a sin of the periphery: “There is not an inflated part of the economy that has to adjust as it happened in the previous crisis,” alleges a government source. And holding on to that, Spain seeks European support. The Executive has aligned itself with Italy and defends that there is an open ESM line for all countries, so that no one in particular is stigmatized. The instrument already exists and can be used immediately with a sharp drop in GDP. The Government is also trying to get the European Investment Bank (EIB) to guarantee a part of the bank guarantees. This would ensure that the guarantees do not end up shooting the debt even further. And as long as they were guarantees, it wouldn’t seem like a ransom. All so as not to be at the mercy of investor panic in the midst of a recession.
One point less of GDP for each month of confinement
The duration of the epidemic will be decisive in determining the damage. As BBVA economist Rafael Doménech points out, a week’s GDP is 2% of that of any year. If at least 25% of the activity disappears, the economy will lose a growth point for each month that passes. And the longer it lasts, the more destruction there will be for companies. The reconstruction of the productive fabric cannot be improvised, and that is another reason that the experts put forward to conclude that the exit in V seems complicated – that one that occurs with the same intensity as the fall.
Hence, governments try to protect companies with aid to prevent them from rolling the blind. However, the fiscal effort can end up being very high. “Maintaining an economy with assisted breathing for several months so that it can later bounce is a huge effort among so many measures to stop the virus. There is much to be endured. It requires financial and fiscal muscle. And countries like Spain start from a delicate situation. But if there is no action, there is a risk that the damage will be permanent, “explains a senior official. To complete this strategy, Europe needs to get involved. And it is not enough simply to allow the deficit rules to be broken. “The ESM or the EIB are more concerned with maintaining their triple A than with helping,” he reproaches with the condition of anonymity.