Bank of Spain Cuts Outlook as EU Aid Slower Than Expected

Spain’s central bank cut its forecast for economic growth this year, saying a weaker-than-expected first quarter and a slow roll out of the European Union’s recovery funds will drag on the pace of recovery.

A higher price of oil, a slightly stronger euro and a rise in long-term interest rates also contributed to the Bank of Spain’s downgrade of its baseline scenario for Spanish gross domestic product in 2021 to a 6% expansion. The previous prediction was 6.8%.

The Bank of Spain’s message reflects a mounting sense of alarm at the European Central Bank that a slow roll out of the 750 billion-euro ($890 billion) recovery fund will hinder a rebound from the pandemic, which has already been stunted by a chaotic vaccination campaign.

The widening gulf between the EU and U.S. economies has forced the ECB to accelerate its bond-buying program to prevent borrowing costs from rising too soon.

The downgrade is due to “this weaker start to the year than what we had expected three months ago and also because we’re seeing that the Next Generation EU funds might not be deployed as quickly as we had forecast in December,” Bank of Spain Chief Economist Oscar Arce said on Tuesday.

The Spanish economy probably contracted in the first quarter by 0.4% after authorities put in place tighter restrictions to stem the spread of Covid-19, the central bank said.

Growth appears to have accelerated somewhat in March, though, as officials relaxed restrictions and the vaccination campaign got underway.

Momentum is due to pick up in the second half of the year as more people are vaccinated and EU leaders agree on the final details of the recovery fund, which will allow national governments to begin to invest the funds.

Spain and Italy are set to receive the greatest portion of the funds.

That faster momentum is expected to carry over into 2022, with the central bank boosting its growth forecast for next year to 5.3% versus a previous estimate of 4.2%.

Much of that boost is because more EU funds will be spent in 2022 rather than in 2021, as initially expected.

The delay won’t necessarily have an outsize negative impact in the medium-term, if officials use the extra time to design more efficient and effective investment projects, Arce said.

The central bank’s baseline scenario assumes that Spaniards will spend much of what they have saved. Officials don’t expect tourism, essential to the country’s economy, to normalize until 2022.

©2021 Bloomberg L.P.

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