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Bank of Spain grows more pessimistic about recovery from record slump

(Recasts, adds details and quotes)

By Belén Carreño

MADRID, Sept 16 (Reuters) – Spain’s recovery from record recession will be slower than expected after a surge in coronavirus infections weighed on activity in the third quarter, likely delaying a return to pre-pandemic levels until 2023, the central bank said on Wednesday.

“The slower acceleration in 2020 than our forecast means a worse starting point for growth in 2021,” Oscar Arce, chief economist at the Bank of Spain, told a news conference.

The bank expects gross domestic product to rebound between 13% and 16.6% in the third quarter after it shrank a record 18.5% in the preceding three months, but it was still likely to be 9.5%-12.3% below year-ago levels.

The forecast is based on a scenario of smaller localised outbreaks and another one of a wider lockdown. The bank now expects the economy to contract 10.5%-12.6% this year, which compares to its previous central estimate of 11.6% in June.

Next year, it expects growth to be between 4.1% and 7.3%, down from its previous forecast of 9.1%.

“The third quarter has not been buoyant, we have gone from more to less … We see more downside risks of ending up worse than the economic forecast interval,” Arce said, naming a no-deal Brexit as one of the key risks.

The bank forecast a slowdown in growth in 2022 to 1.9%-3.3%.

The projections did not factor in the potential availability of a coronavirus vaccine or the use of the European recovery fund, which could speed up the recovery. Spain is entitled to 140 billion euros ($166 billion) of EU grants and loans.

Alongside Britain, Spain is the developed economy that contracted the most during the lockdown phase and its recovery looks slower than for the rest of the European Union, mostly due to its heavy reliance on tourism.

“The data on foreign travellers offers a Dantesque view,” Arce said. Tourist arrivals began to decline again in early August due to stricter travel rules abroad.

The budget deficit, which the central bank projects at 10.8% this year in its best-case scenario, should shrink only slightly to 7% in 2021, the bank said.

With over 600,000 cumulative infections and 30,000 deaths, Spain is the worst-hit country in western Europe.

($1 = 0.8430 euros) (Reporting by Belen Carreno, Victoria Waldersee and Inti Landauro, editing by Andrei Khalip and Nick Tattersall)


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