Intermoney | The Bank of Spain has proposed different macroeconomic scenarios for Spain deriving from COVID-19. From the supply side perspective, the institution offers three scenarios that would lead to severe or very severe falls in GDP in 2020: scenario 1, -6.6% (8-week lockdown and almost complete normalisation after lockdown), scenario 2, -8.7% (8-week lockdown and almost complete normalisation in Q4’20 ) and scenario 3, -13.6% (12-week lockdown and incomplete normalisation by year-end, particularly in the segments of the economy linked to the hotel and leisure industry).
That said, the Bank of Spain correctly points out that the above-mentioned supply-side approach is only “useful for providing a credible estimate of the initial magnitude of the disturbance”. This approach does not provide a description of subsequent developments, looking beyond the short term, as it does not incorporate explicit modelling of the relationships between economic aggregates”.
So the institution has presented a second approach based on the model used to prepare its own macroeconomic projections. They offer three equally negative scenarios with regard to 2020. But there was some glimmer of hope if one looked beyond 2021. This takes into consideration the fact that “economic policy actions not only make it possible to reduce the depth of the recession in the short term, but should also favour the achievement of a higher level of GDP and employment in a somewhat longer time horizon”. In fact, at end-2021, in the most positive scenario, the recovery of Q4’19 activity levels would already be reached. In the other two, this milestone would be achieved in Q2’22; these are assumptions which seem somewhat optimistic to us. We propose that under a prudent scenario, Q4’19 GDP would not be recovered until the final part of 2022.
In practice, the three scenarios elaborated following the Bank of Spain model gave the following results for GDP: -6.8% in 2020 and +5.5% in 2021, discounting 8 weeks of containment and that the measures avoid lasting job losses and company closures; -9.5% in 2020 and +6.1% in 2021, discounting 8 weeks of containment and that a certain proportion of companies fail to prevent liquidity difficulties from turning into solvency problems; -12.4% in 2020 and +6.1% in 2021, discounting 12 weeks and that a certain proportion of companies (higher than in scenario 2) fail to prevent liquidity difficulties from turning into solvency problems.
Along with the above figures, there is also focus on what we can expect from the public accounts and the Bank of Spain made it clear what is likely to happen: the deterioration will be very significant. In this area, their scenarios showed a range for the public deficit of between -7.2% and 11.0% by 2020, with public debt at 109.9%-122.3%; indicators which would then be between -5.2% and -7.4%, and at 109.4%-120.3%, respectively, by 2021.
Overall, the Bank of Spain’s scenarios for Spain’s economic deterioration in 2020 seemed quite realistic and accurate. However, we are somewhat optimistic about the paths to recovery in activity, as well as the estimates of indicators relating to the public accounts.