The reopening of the economy since the end of Q1 has spurred economic activity after a weak start to the year (figure 1). In Q2, GDP grew with 2.8% q/q after contracting 0.4% in Q1. According to Spain’s statistics office INE, headline growth was mainly driven by surprisingly strong consumption growth (+6.5% q/q), showing that households have been willing to catch-up spending rapidly when it was allowed again. At the same time, however, investment and export growth disappointed, with the former contracting and the latter only growing slightly, despite sentiment having improved substantially and despite strong order books. Supply chain issues such as product shortages and transport difficulties are among the main culprits. Investment growth was probably also tempered by the still relatively low average capacity utilisation rates in both industry and services and the deterioration of balance sheets of hard-hit firms. Finally, services exports were suppressed by tough restrictions on outgoing and incoming international travel for the largest part of the first half of the year, both at home and abroad.
Figure 1: Mobility increased significantly over H1
Figure 2: Service sector benefits from reopening
From a sectoral perspective, improving activity in the services sector was the main driver of growth (3.4% q/q), while value added in industry barely grew (0.5% q/q) and contracted rather sharply in the construction sector (-3.1% q/q). Especially the recreation and entertainment and the food and accommodation sector benefitted from fewer restrictions. Value added in the former increased by 20% q/q and turnover in the latter grew 35% q/q. At the same time, industry and construction suffered from supply chain bottlenecks.
The recovery in the second quarter has lifted GDP to its highest level in a year. But it is still almost 7% below its pre-crisis peak (figure 3), making Spain the worst performer in the Eurozone.
Figure 3: GDP volume recovery still long way to go
Figure 4: Services sector catches up with industry, while construction continues to slip
The only way is up
Going forward, the recovery is set to continue with again strong albeit slowing growth rates in the coming quarters. Based on timely activity data and sentiment indicators, the fifth Covid-19 wave caused by the Delta variant seems to have slowed the recovery a bit, but it has not undermined it. Investments will benefit from improving income flows and capacity utilisation rates in especially the services sector, while direct public aid to hard-hit yet still-viable firms should also alleviate debt burdens caused by Covid. Furthermore, the EU recovery fund will support investment. In August, Spain received its first tranche of EUR 9bn of the EUR 70bn it is entitled to if it adequately implements the investments and reforms it has presented in its recovery plan. Meanwhile, tourism benefits from eased travel restrictions: in July overnight stays in tourism accommodations were down ‘just’ 33% compared to July 2019; in Q2 that was still as much as 75% compared to 2019Q2. That said, it is clear that the recovery of tourism activity and the recouping of losses suffered still has a long way to go, with ongoing restrictions on international travel continuing to hamper that recovery.
Finally, we expect consumption growth –although it is still strong and supported by the labor market recovery– to slow as a significant part of the reopening boost has passed. Moreover, (i) consumer price inflation has ratcheted up (3.3% in August) and wages will not follow (1.5% y/y in July); (ii) excess savings are concentrated in the higher income/wealth quintiles of the population, which have a lower propensity to consume, while income losses have been suffered by the poorer part of the population with a higher propensity to consume; (iii) willingness to make major purchases has lost some momentum; and (iv) as far as 21Q3 is concerned, Delta has led to some intensification of restrictions on movements and gatherings. We expect consumption to approach its pre-crisis volume in the final quarter of the year, but the last part of the recovery to take another few quarters.
Finally, supply chain bottlenecks causing shortages and rising input costs continue to hang over the entire economy as the sword of Damocles, and especially over the industrial and construction sector. While these bottlenecks are likely to soften at some point, we expect them to remain present in the coming quarters.
All in all we expect GDP to come in at 6.1% this year and 5.1% next year, which is a minor revision from our previous forecast of 5.9% and 5.2%. It does mean, however, that we now forecast GDP to reach its pre-crisis level in the final quarter of 2022 instead of the first of 2023.Unemployment is expected to average 15.4% in 2021 and 15.0% in 2022, compared to 14.1% in 2019 and 15.6% in 2020.