Spain will be one of the European economies with a fall in the largest economy.
It was an open secret. Spain’s economic recovery that began in the third quarter has come to a halt. The second wave of covid-19, which began in Spain before the rest of Europe, puts the national economy on the brink of a double recession. Technology allows today to follow the behavior of the activity in almost real time, and the latest consumer data reveal that the main component of Spanish GDP has collapsed in the final stretch of October, after several weeks and months of hesitation and some volatility.
CaixaBank Research: “To contextualize the situation, it is necessary to go back to the week of May 18-24 to find a record of household spending lower than this week”
Precisely, the advanced consumption data published by BBVA and CaixaBank Research were those that anticipated in August that the economic recovery was beginning to lose steam, something that was confirmed later. Now, these same numbers show a relevant drop in spending, a dire omen for the GDP data for the fourth quarter. Private consumption in Spain represents close to 60% of GDP, so a large part of the evolution of the economy depends directly on this component. The second wave of the coronavirus, increasing restrictions and a reeling job market are eroding economic activity by leaps and bounds.
“The latest data point to an unfavorable evolution of domestic consumption caused by falls in face-to-face consumption and withdrawals. To contextualize the situation, it is necessary to go back to the week of May 18 to 24 to find a record of household spending lower than this week “, explains Eduardo Llorens i Jimeno, economist at CaixaBank research in the note where the latest data is published.
Total spending with Spanish and foreign cards at point of sale terminals (POS) plus cash withdrawals at CaixaBank ATMs has plummeted 17% in year-on-year terms during the fourth week of October (from October 19 to 25 ). On the other hand, in the week from 12 to 18, the decrease had already been 13%.
The importance of private consumption
During the collapse of the economy in the second quarter of the year, private consumption played the most relevant role. GDP sank by 21.5% year-on-year (17.8% quarterly) and of those 21.5 points, more than 14 were due to the drop in consumption.
In a context like the current one in which foreign trade can take a long time to recover, domestic demand should be the one that tries to compensate for the slowdown in the economy. Measures such as Ertes or other aids seek to cushion the fall in family income so that consumption remains alive. However, the strong uncertainty about the future is partially sterilizing the effect of these policies and, what is worse, it could continue to do so going forward.
“Putting the focus on the horizon, the high degree of uncertainty and the restrictive measures that may be imposed in the different autonomous communities under the umbrella of the new state of alarm do not create a favorable scenario for a significant recovery of consumption data during the coming weeks, “says Llorens i Jimeno.
All of this could end up causing a new quarterly decline in GDP in Spain in the last quarter. The national economy would thus draw a kind of W, with a sharp drop in GDP in the second quarter, an intense recovery in the third (with summer in between) and a relapse towards the end of the year as the second wave of the virus has been impacting the economy.
“In the fourth quarter we expect growth to return to negative territory in Spain. With the second wave of covid-19 also expanding rapidly in the rest of Europe, and recent pessimistic survey data, it appears that we are moving from a recovery of the Nike logo to a W-shaped logo. For 2020 as a whole, we currently expect economic growth to be -15% in the country, “says Steven Trypsteen, economist at ING.
Spain is feeling with special intensity this relapse of the economy due to the structure of its productive fabric. But the rest of the European countries do not seem immune, far from it. The real-time indices that Oxford Economics manages for the euro zone reveal that the health and mobility sub-indices continue to deteriorate as infection rates increase during the month of October, which has prompted governments to reintroduce restrictions on the whole block.
“This is very likely to translate into weaker consumption, and the subcomponents of the service sector, which are already stagnant, appear vulnerable. More generally, growing uncertainty contributes little to business confidence and hiring intentions, even among the manufacturing sector, which is relatively protected, “concludes Neal Kilbane, senior economist at the firm.