Spain cuts 2021 growth forecast to 6.5% after first-quarter contraction

FILE PHOTO: Informal Meeting of Ministers for Economics and Financial Affairs in Berlin
FILE PHOTO: Spanish Economy Minister Nadia Calvino is welcomed by German Finance Minister Olaf Scholz (not pictured) at the Informal Meeting of Ministers for Economics and Financial Affairs in Berlin, Germany, September 11, 2020. REUTERS/Hannibal Hanschke/Pool/File Photo

April 9, 2021

By Belén Carreño and Nathan Allen

MADRID (Reuters) – Spain’s government slashed its forecast for this year’s economic recovery on Friday to reflect a COVID-induced contraction in the first quarter and expected delays to the arrival of EU rescue funds.

The government now expects gross domestic product to grow 6.5% in 2021, down from a previous estimated range of 7.2%-9.8%, Economy Minister Nadia Calvino told a news conference.

With its economy – the euro zone’s fourth-largest – highly dependent on foreign tourism, Spain suffered more than most developed countries during the first year of the pandemic, posting a record contraction of 10.8% in 2020.

A third wave of the coronavirus hit the country in the first two months of the year, and a massive snowstorm also disrupted activity in much of Spain in January.

“The recovery is delayed by one quarter,” Calvino said, adding however that the government expected a strong increase in the second half of 2021.

The Bank of Spain had already lowered its 2021 growth forecast for similar reasons to 6%, while the International Monetary Fund expects a 6.4% expansion.

As global vaccination efforts ramp up, the economy should expand by 7% in 2022, with output recovering to pre-pandemic levels by the end of that year, Calvino said, before slowing down to 3.5% in 2023 and 2.1% in 2024.

Unemployment should stabilise at 15% this year and slowly recede through 2024, thanks to the cushioning effect of the ERTE government furlough scheme, which should keep jobless figures well below the record high of 27% seen in the last financial crisis.

The disbursement of 140 billion euros ($166.40 billion) in European Union recovery funds over the next three years – around half in grants – will further boost the economy, but most of the impact will not be felt until 2022.

Calvino had estimated last year that the funds would lift growth to 9.8% in 2021. The 6.5% growth forecast for 2021 includes the effects of the funds, she said.

Madrid and other European capitals have complained about the complexity getting European Commission approval for investment projects using the funds.

Prime Minister Pedro Sanchez will present Spain’s final recovery plan on Wednesday, one of the earliest countries in submitting it.

($1 = 0.8413 euros)

(Reporting by Inti Landauro, Jesús Aguado, Nathan Allen and Belen Carreno; Editing by Andrei Khalip and Raissa Kasolowsky)