Spain

Pressure on companies, ambitious stimulus facing implementation hurdles

LOW RISK for enterprise

Economic risk
Business environment risk
Political risk
Commercial risk
Financing risk

Economic risk
Business environment risk
Political risk
Commercial risk
Financing risk

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GDP

USD1281,1bn (World ranking 14, World Bank 2020)

Population

59,3mn (World ranking 24, World Bank 2020)

Form of state

Parliamentary monarchy

Head of government

Pedro Sánchez

Next elections

General elections, 2023

Good performance and competitiveness in some specific sectors, although competitiveness gains are starting to reverse
Presence of large international companies
Fiscal deficit now below 3% of GDP, and public debt-to-GDP ratio has started to decrease
Bridge between Latin America and the rest of the world
Large economy
Good infrastructure network

Still high public debt (>97.4% of GDP)
High private debt
Still high unemployment (14.5%) despite progress
No recent structural reform on education and training
Fragmented political landscape, internal tensions over sovereignty issues (Catalonia)

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In Spain, the reopening of the economy post Covid-19 will continue to boost growth in the short-term. GDP growth in the first quarter proved more resilient than initially anticipated – albeit in negative territory at -0.5% q/q - and we expect it to rebound to +5.1% in 2021 and +5.3% in 2022, after contracting by -10.8% in 2020. The recovery will be mainly driven by domestic demand fueled by the gradual phasing-out of pandemic-related restrictions in the context of progress on the vaccination campaign in the country and in Europe. In sectorial terms, trade, industry and services, including tourism with the re-opening of borders to vaccinated tourists, will drive the recovery.

Upside risks to economic activity stem from the fiscal stimulus envisaged within the 2021 budget. Continued pandemic-related measures to support households and businesses will support economic activity in 2021. In the 2021 budget, the government plans to allocate EUR27bn (2.3% of GDP) of the EUR69.5bn in grants it requested from the Next Generation EU (NGEU) facilities over 2021-2026, mostly from the Resilience and Recovery Facility (RRF) with EUR59.2bn and REACT-EU with EUR12.4bn. The funds are mostly destined to finance green and digital projects and will allow the government to increase investment spending in 2021. They could generate an additional +1.4% growth in 2021.

Downside risks to this scenario persist, mainly as regards the low efficiency of EU Funds implementation in the recent past. Uncertainty over the development of the pandemic locally and worldwide, especially in the light new variants, as well as risks to the vaccination campaign domestically could weigh on economic activity and especially on tourism. In addition, implementation risks could limit the impact of the stimulus package on growth. The previous take-up of EU funds (34%) and public sector effectiveness are also relatively low.

Pressure on companies may continue and business insolvencies are already on the rise. The percentage of companies subjected to great financial pressure soared by 27pp between 2019 and 2020 to 40%. There is a risk that the phasing-out of emergency support measures for companies, especially the end of the grace period for loans made under the public loan guarantee scheme, may increase financial difficulties for vulnerable companies. This is likely to particularly affect SMEs, which constitute a large share of Spanish firms. However, companies’ increased bank deposits are likely to play a mitigating role. The European stimulus package geared towards a green and digital economy could help boost productivity and innovation to bridge the productivity and growth gap between Spain and the EU-8. However, it is uncertain whether the stimulus package will directly benefit SMEs in the short-term.

Unemployment is likely to remain high. Emergency measures helped limit the impact of the crisis on the job market, but Spain did not resort to furlough schemes as much as other European countries and unemployment increased to 15.5% in 2020 from 14.1% in 2019. The recovery should contribute to reactivate employment in 2021 but we expect the unemployment rate to increase slightly in 2021 to 15.9% as furlough schemes are phased out. Risks to employment also stem from the predominance of SMEs in the Spanish economy, as they are more vulnerable to liquidity shocks, and from the high share of temporary contracts.

Public finances will remain a challenge in the medium-term, but ECB policy should remain very accommodative at least until 2023. We expect the authorities to narrow the deficit to 8.5% of GDP in 2021 from 12.5% of 2020, and then to bring it down to 5.0% of GDP in 2022, thanks to a gradual phasing out of emergency measures, a boost to tax revenues with recovering economic activity and the decline in unemployment benefits. As a result of the higher deficit and a contraction in nominal GDP, public debt rose to 118% of GDP in 2020 from 95% in 2019 and we expect debt levels to increase slightly in 2021 to 119%. Despite the increase in public debt, spreads on Spanish debt have remained low owing to the ECB’s accommodative monetary policy. - June 2021

Trade structure by destination/origin

(% of total, 2020)

Exports	Rank	Imports
France 15.4%	1	11.8% Germany
Germany 10.8%	2	10.2% China
Italy 7.5%	3	9.9% France
Portugal 7.3%	4	6.2% Italy
United Kingdom 6.0%	5	4.9% United States

Trade structure by product

(% of total, 2020)

Exports	Rank	Imports
Road vehicles 15.4%	1	10.2% Road vehicles
Vegetables and fruits 7.2%	2	7.2% Petroleum, petroleum products and related materials
Medicinal and pharmaceutical products 4.6%	3	5.7% Electrical machinery, apparatus and appliances, n.e.s.
Electrical machinery, apparatus and appliances, n.e.s. 4.1%	4	5.4% Medicinal and pharmaceutical products
Articles of apparel & clothing accessories 3.9%	5	5.3% Articles of apparel & clothing accessories

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