Spain’s Economic Outlook Questioned by Central Bank Governor

Spain’s government is too optimistic in its economic forecasts for next year and may need to revise its projections for output, the deficit and unemployment, the country’s central bank chief said.

The restrictions put in place to stem the spread of Covid-19 have darkened the economic outlook across the region, Bank of Spain Governor Pablo Hernandez de Cos told Spanish lawmakers in Madrid on Wednesday. The bleaker prospects, and uncertainty about the impact of the virus in coming months, mean that there are clear “downside risks” to the government’s forecasts, he said.

While Socialist Prime Minister Pedro Sanchez’s administration foresees an economic contraction this year of 11.2%, Hernandez de Cos said the Bank of Spain’s pessimistic scenario of a 12.6% drop is more likely. The government’s expectation that the economy could bounce back by more than 7% next year is also a bit rosy, he added.

Next year’s unemployment rate is likely to be higher than Madrid expects and the budget deficit is set to be wider. “There’s a significant risk that the budget deficit next year rises above the forecast of 7.7%,” Hernandez de Cos said.

Sanchez’s left-leaning coalition government is trying to push through a budget by the end of the year to counter Spain’s economic contraction, one of the deepest in Europe. While passing a budget is a run-of-the-mill affair in many countries, lawmakers in Spain have only approved one in the past five years because of political divisions.

Sanchez and his ministers want to increase some taxes as well as the salaries of civil servants. Hernandez de Cos, who also sits on the European Central Bank’s Governing Council, said the fragile economy recovery means tax hikes should probably be delayed and that a negative inflation rate negates the need to boost wages immediately. If the government does want to boost salaries, it should consider targeting wage increases, perhaps for health-care workers, the governor said.

The Spanish government could also struggle to deliver on its plan to invest billions of euros in European Union recovery funds next year given its poor track record, Hernandez de Cos warned lawmakers, a handicap that could add a further drag on growth. Sanchez has said his administration will invest 27 billion euros in EU recovery funds in 2021.

Quickly spending such a massive amount of money “looks optimistic in light of historical and empirical evidence,” the central bank governor said. Spain has fallen short in investing EU funds in the past, he said, never absorbing more than 80% of the subsidies available during the past seven years.

©2020 Bloomberg L.P.

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