IMF: Spain, the economy hardest hit by the coronavirus
The effects of the coronavirus have been seen throughout the Iberian Peninsula.
According to its latest report, the International Monetary Fund (IMF) has announced that Spain is the worst of the advanced economies in 2020, with a forecast fall in gross domestic product (GDP) of 12.8 percent. It seems that the IMF is somewhat more pessimistic in this respect than the Spanish government, which is forecasting a contraction of 11.2 percent. In the case of several countries, estimates have improved. Four months ago, for example, estimates for the United States, Germany, France and Italy predicted deeper falls. However, today the figures are better than previously announced. Spain is the big exception. In your case, the situation is worse than expected. Why?
The Fund now forecasts a contraction of 12.8% compared to 8.3% for the euro area as a whole. Spain maintained three months of confinement last spring and had a disastrous summer for tourism. Now, to make matters worse, the upsurges are all over Spain, attacking the population mercilessly. The restrictions on mobility directly affect travel, tourism, hotels and consumption in general. In other words, the Spanish economy is at the mercy of the virus. If contagion subsides and the economy returns to normal sooner than expected, the IMF’s estimates could prove to be an exaggeration. On the other hand, if the pandemic worsens, these same estimates could fall short.
Of course, Spain is not on the list of the worst in the world. The Fund forecasts setbacks of 13.9 percent in Peru, 25 percent in Venezuela, 25 percent in Lebanon and 52 percent in Macao. However, no one will fall as much in Europe as Spain. Only San Marino (-11%) and Italy (-10.6%) are relatively close.
The impact of this crisis on world GDP has been tremendous. This has not been seen in the last 90 years. And the consequences on the labour market have been dramatic. According to the IMF, the unemployment rate in Spain will rise to 16.8% by the end of this year and the figure could remain the same at the beginning of 2021. This crisis is undoubtedly hitting low-income workers, young people and women a little harder.
In this regard, the economic recovery is likely to be long, uneven and uncertain. That is why it is important to maintain the liquidity injections to help the most affected enterprises and families. And it is vital to be flexible with debt holders and tax payers. Many promote absolute austerity at times like these, justifying the measure as a monetary good. The free market and the harshness of the currency above all. But such measures carry a very large humanitarian and economic cost.
Now, why Spain? First of all, practically one-third of Spain’s gross domestic product comes from activities dependent on mobility and agglomeration. Tourism, hotels, restaurants, etc. In other words, it is not entirely untrue to say that Spain is a great party. The coronavirus has been fatal for Spain due to the economic configuration of the country. Overdependence on tourism has been its condemnation. This reminds us of the importance of diversification.
Of course, part of the problem lies in the country’s economic structure, which is based on a medium or low value-added production model. This is the contrast with countries like Germany. Despite the fact that this crisis has distorted production and distribution chains in many sectors, in general terms, industry has not suffered as much. This could explain the advantageous situation of China, which is technically not in recession, with an estimated economic growth for this year of 1.9%.
In the opposite situation, we have most of the Latin American countries whose main economies depend on the export of raw materials. The crisis in Latin America is worse than in Spain. In this case, tourism is not so important. It is important, but the prices of raw materials on the international market in the region play a much more decisive role. Oil-exporting countries are being particularly hard hit. And countries with close relations with Asia are slightly better off.
Returning to the Spanish case, there is a third factor that could explain the particular vulnerability of the Spanish economy. This is its lack of uniformity. In Spain, there are regions with an unemployment rate of two percent and others with an unemployment rate of 40 percent. In all countries, you can see a kind of dual economy. This is the economy of the large urban centres and the economy of the peripheral regions that do not enjoy the same prosperity. The problem is that in Spain this is happening to an extreme degree. The reality in Madrid or Barcelona is radically different from the situation in places like Jaén or Cádiz.
The crisis of political leadership during this crisis has been evident. The Spanish government does not appear to be in control of the situation. In other words, this has got out of hand. It could be said that the crisis is threefold: health, economy, and politics. All this has exposed the old flaws in the Spanish economy. Obviously the country needs a plan.
Now, what can we individuals do? Beyond spending less and producing more, the average person can look for opportunities in the digital economy. It is also possible to find opportunities for arbitrage, taking advantage of the price distortion in world trade. Not to mention the opportunities to buy at excellent prices in some areas. Not everything is negative in this type of crisis.
The IBEX 35 has not recorded the same recovery as the S&P 500. This means that we cannot say that Spain is in the middle of a financial bubble. In other words, there are opportunities everywhere. It is possible that many companies will be in discount. Suddenly, it’s a good time to buy.
Despite the crisis, the Crypto Cash and fintech sector in Spain seems to be in good shape. Reports are very encouraging. Of course, some offices have been forced to make some layoffs, but, in general terms, Spanish start-ups are weathering the storm with great resolve.
The coronavirus has hit Spain very hard. Things are not easy. But the secret to overcoming a crisis is not discouragement. In fact, quite the opposite. We have to work harder than before to alleviate the situation. Crises also bring opportunities. It is a question of working hard and being vigilant. Crises come, but then they go. The secret is to keep fighting.