Spain Warned Economy at Risk as New Virus Restrictions Planned

(Bloomberg) -- Spain’s nascent economic recovery is under threat because of a second wave of coronavirus infections, the International Monetary Fund said, warning that the government shouldn’t remove fiscal support too early.

Spain has the highest number of cases in Europe, and the IMF assessment comes as the country prepares to impose new targeted restrictions in hotspots such as Madrid. Health officials from regional administrations will on Wednesday be asked to approve government plans, which would involve additional curbs on social gatherings as well as bars and restaurants.

While such measures will hit the already-beleaguered hospitality industry, the IMF said controlling the virus is vital for the economy. In the review, which was conducted before the latest measures were announced, it predicted a 12.8% economic contraction this year.

“Getting the second wave of infections under control will be critical for the economic outlook,” the Washington-based fund said. Risks are “tilted strongly to the downside.”

Madrid has become the focus of the pandemic in Europe after the number of new cases surged toward the end of the peak tourist season and a fight between local and national leaders delayed the introduction of new measures.

But the dilemma over how to restrict movement without completely undermining the economy is also playing out across Europe, where the rate of infections has accelerated. In recent days, Germany, France and Italy all posted the highest figures since they eased lockdowns before the summer.

Spain is particularly vulnerable to the pandemic crisis because of its reliance on tourism and its greater concentration of small companies, many of which don’t have the financial strength to cope with even a short-term disruption.

Also, companies rely heavily on precarious, temporary contracts -- a long-standing flaw that means unemployment could rise to around 20% this year and hover around that level for at least a couple of years.

For that reason, the IMF said the government should maintain its national furlough program as well as a state-backed loan guarantee fund, making them more targeted as the crisis drags on. It should also consider extending some version of a temporary equity support fund for large companies to some viable smaller firms.

More than 30,000 people in Spain have been killed by Covid-19 since the start of the outbreak and the country has been adding almost 50,000 new cases a week.

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