Bank of Spain Sees Economy Shrinking by Up to 12.4% in 2020

(Bloomberg) -- Spain’s economy could contract this year by more than 12% in a worst-case-scenario forecast by the country’s central bank, the first official figures that spell out the potential toll of the coronavirus pandemic on the European Union’s fourth-largest economy.

The economic shock could push the unemployment rate to as high as 21.7% this year, undoing gains achieved in the aftermath of the 2008 global recession and the subsequent European debt crisis. At nearly 14%, Spain’s unemployment rate is already one of the highest in the developed world.

Spanish employers’ over-reliance on precarious, temporary contracts for workers and an economy that depends heavily on tourism means Spain’s labor market is particularly susceptible to a hit from the pandemic. March jobless claims rose the most on record, in line with the historic damage the disease has unleashed in labor markets around the world.

Spain’s central bank says the economy could shrink between 6.8% and 12.4% this year, a range that’s based on how long confinement measures are maintained as well as the survival rate of businesses. Spanish bonds fell after the report, pushing the yield on 10-year debt up seven basis points to 0.89%.

Spain has the world’s second-highest number of coronavirus cases, which climbed past 200,000 on Monday. At the same time, the number of new infections is leveling off and the number of daily deaths is declining.

Most Spaniards have been in lockdown since mid-March and, in the Bank of Spain’s central scenario, the government would extend those measures for a total of eight weeks through around mid-May. Prime Minister Pedro Sanchez said this weekend that he planned to keep the majority of the population in lockdown through at least May 9. The central bank’s base case assumes some Spanish companies become insolvent because of the lack of liquidity.

Using those two scenarios as a base, the Bank of Spain foresees a contraction of 9.5% this year. The central bank said in a report published on Monday that the economy probably already shrank by 4.7% in the first quarter.

Once the government lifts confinement orders and Spaniards are able to get back to work, the economy will start to recover. The Bank of Spain forecasts a GDP rebound in 2021 of between 5.5% and 8.5%. However, that recovery won’t be enough to compensate for the contraction expected this year.

Like other European countries, Spain has pledged to spend billions of euros to ensure the country’s companies survive the economic lockdown and also to support the millions of Spaniards who have been temporarily or permanently laid off.

That spending is expected to push Spain’s already notable budget deficit to between 7% and 11% of gross domestic product. The country’s debt-to-GDP ratio could increase to as high as 120% this year versus 95.5% in 2019, the Bank of Spain said.

©2020 Bloomberg L.P.