23.07.2020
Challenges for the Spanish economy in the face of the impact of the
pandemic
Webinar Economy, work and society in Spain. The impact of COVID-19. Spanish
Economic and Social Council (CES)
Pablo Hernández de Cos
Governor
Honourable Minister for Labour and Social Economy, Chair of the Spanish Economic and
Social Council, ladies and gentlemen,
Good morning. It is a pleasure to be able to participate today in this presentation of the
Annual Report of the Economic and Social Council (CES). As earlier highlighted, its content
goes beyond the 2019 timeframe of events and delves into the challenges that the
COVID19 pandemic entails for the economy, for social cohesion and for the labour market in Spain.
In this respect, the CES and the Banco de España have concurred in recent weeks that our
respective studies and annual reports should strive to be useful instruments that help
society face these challenging times.
An incipient, incomplete, uncertain and uneven recovery
The COVID-19 pandemic has exacted a very high price in terms of human lives as well as
deep-seated disruption to society and the economy. As a result, the dynamics marking the
global and Spanish economic environment in late 2019 and early 2020 have been abruptly
altered. Specifically, the pandemic and the lockdown measures to combat it have affected
all economies most adversely.
In Spain's case, in a setting in which the state of alert affected the last two weeks of Q1, we
witnessed the biggest-ever contraction in GDP historically in a single quarter, namely a
quarter-on-quarter rate of 5.2%. This decline was one of the most pronounced in the euro
area, and was in response to several circumstances. These included a relatively greater
severity of the lockdown measures (given, too, the greater intensity of the pandemic) and
the presence of certain structural factors in our economy that make it more vulnerable to a
shock of these characteristics. The most significant factor here is perhaps the high weight
of the tourism-related sectors, which have been particularly affected by the social distancing
measures. The reduction in hours worked, estimated at 5% in Q1, was also the
biggestever in the time series and highlights the marked impact of the various measures affecting
movement on the labour market in the early stages of this crisis.
Admittedly, the restrictions on movement were gradually eased as from early May. But the
state of alert ran for much of Q2, whereby a notable increase in the decline in GDP and in
employment in this period is to be expected. The latest Banco de España macroeconomic
projections, published in June against a background of unusually high uncertainty, posted
estimates of quarter-on-quarter declines in activity in a range between -16% and -21.8%.
And the information since available tends to confirm that the decline in economic activity in
Q2 as a whole will have been in this range.
That said, an improving path could be seen throughout Q2, in tandem with the ongoing
gradual reopening of the economy. At present, then, we are witnessing an incipient
recovery in the economy, which, however, is still incomplete, uncertain and uneven.
The correlation of this economic activity during Q2 with the intensity of the restrictions on
people's movement in force at each point in time was very high. Thus, some indicators that
measure people's movements hit record lows in the first two weeks of April, with declines
of around 80% in motorway traffic and fuel consumption, and of over 90% in the case of
airport traffic. This was reflected in the high-frequency indicators of economic activity in the
weeks in which the lockdown was stricter; then, for example, we saw reductions in electricity
consumption by firms and in consumer spending paid using cards of approximately 30%
and 60%, respectively. For April as a whole, there was an unprecedented event in the time
series when some variables fell practically to zero. This was the case of new car registrations
and international tourist inflows, the latter variable obviously being closely related to the
restrictions on personal movement.
Since early May, and to a greater extent in June, the progressively staggered and
regionbased easing of the lockdown measures prompted a gradual recovery in the mobility
indicators and, in tandem, in economic activity indicators. This was particularly so in the
final stretch of the lockdown-easing process when trips between provinces in different
regions and the arrival of foreign tourists from the Schengen area were once again
permitted.
However, it is worth noting the role that voluntary limitations on movement probably
continue to play. These mean that movement is still some way off full normalisation,
especially as regards international movements, which are so important for a country such
as Spain where, as you know, the significance of tourism within the productive structure is
so high.
In late June, the volume of air traffic was still 65% down on the previous year. The recovery
has been more patent in the mobility indicators, which tend mainly to reflect national
movements (such as motorway traffic), or the indicators constructed with mobile telephony
data, which include trips to workplaces, retail establishments or leisure centres, with
yearon-year reductions of around 15% in all instances.
This path of partial recovery in mobility has been reflected in the high-frequency indicators
of economic activity, whose year-on-year declines have progressively eased. By way of
example, the fall in electricity consumption by firms is expected to have eased between the
opening weeks in April and the final weeks in June by close to 20 pp, to around - 10%.
Likewise, the progressive re-opening of commercial establishments deemed non-essential
since early May prompted a pick-up in retail sales that month, more markedly so in the case
of products whose sales were more affected during the lockdown, such as personal
equipment goods, home equipment and motor fuel. This improvement in consumer
spending is expected to have run into June, according to the information available on
payments made using cards.
Throughout Q2, the labour market moved on a path of recovery similar to that described for
economic activity. Consequently, the fall in Social Security registrations eased in May and,
especially in June, following the heavy declines recorded in the second half of March and in
April.
In any event, registrations provide a partial picture of the scale of the labour market
adjustment since the start of the crisis, insofar as the workers affected by furlough-like
schemes (ERTEs) continue to be considered as registered, despite the fact they are not
contributing to production. For a truer assessment of changes in the labour force since the
onset of the crisis, regard is had to the series of registrations after having stripped out
workers subject to ERTEs. This series, which might be dubbed "actual registrations", is
estimated to have shown a year-on-year decline of 22% at end-April, with much sharper
reductions in some of the services segments most affected by the restrictions on movement
associated with the state of alert, such as the hospitality sector. As of late June, the annual
decline in actual registrations is estimated to have eased, such that the level of actual
registrations was 11.4% down on the figure a year earlier.
Should the epidemiological situation not change significantly, the recovery observed in Q2
will continue over the summer and give rise to high quarter-on-quarter growth in Q3.
Nonetheless, interpreting this growth calls for caution, since we should not lose sight of the
fact that the level of activity will continue to be significantly below that observed prior to the
pandemic breaking, such that the process of recovery will be far from complete. We can
thus talk of an incomplete recovery, using the first of the three adjectives I referred to at
the start of my address.
The conditioning factors I mention for the short-term outlook to materialise - the absence of
any material changes in the course of the pandemic in Spain - are no minor matter. Indeed,
economic developments would be adversely affected in the coming months, perhaps
severely so, if the outbreaks seen in recent weeks in different territories after the easing of
the restrictions on movement could not be controlled with local-level and temporary
measures. Accordingly, health-related uncertainties will persist for some time until effective
treatment for the illness or widespread access to a vaccine against the virus are achieved.
Moreover, the doubts over economic developments in the coming quarters are not confined
to the health area. In particular, along with the adverse impact that the social distancing
measures we may have to maintain in the future may exert on activity, there is a further
effect. This is more difficult to measure a priori and relates to the possible and potentially
persistent changes in agents' behaviour in response to the "new normal". These changes
might include modified patterns of consumption and saving, or changes in supply chains or
in certain aspects of firms' operations. All these considerations would warrant qualifying the
current recovery as uncertain, to take the second of the adjectives I used earlier to
characterise this recovery.
Additionally, from the standpoint of the sectors of activity, not all of them suffered on a
comparable scale the consequences of the pandemic lockdown measures, as they are not
equally susceptible to the imposition of social distancing measures. And the gradual
startup in activity is not taking place at the same pace in the different sectors. The earlier
normalisation of manufacturing and of certain services coexists alongside a slower than
usual recovery in levels of activity in those other services, such as leisure and hospitality,
where personal interaction is greater. Here, full normalisation is not likely to be attained until
we have an effective medical solution. These differences in the pace at which normal levels
of activity in productive sectors are being restored allows us to characterise this recovery
as uneven, taking the last of my three adjectives.
The economic policy response in this second phase of the crisis
Naturally, the economic policy response to this crisis should adapt to how the pandemic
unfolds healthwise. At this second phase of the crisis, with the characteristics I mentioned,
the economic policy response must combine two objectives: to support the recovery
- which advises avoiding a premature withdrawal of the support measures that would raise
the risk of economic growth undergoing more lasting damage - and to smooth the
adjustment of the economy to the post-pandemic scenario.
The importance of European support
To achieve these objectives, the economic policy response in this second phase of the
crisis should have the firmly resolute backing of the European Union (EU). Indeed, given
the enormous economic and financial interactions across the area's various economies,
joint action is the most effective means of ensuring that the economic effects of the
pandemic will be overcome in a shorter time and at a lower cost to each and every country.
This is particularly important in the current situation, where we face a global crisis, but which
is exerting asymmetrical economic effects on the different countries. European action is
particularly important so as to avoid an uneven exit from the crisis that bears down on overall
economic growth for a longer period. These arguments, beyond those relating to necessary
European solidarity, highlight the importance of the agreement reached by the European
Council last Tuesday with the approval of the European recovery fund.
In fact, as you know, the result of the European Council meeting some days back was, I
would venture to say, most satisfactory. First, agreement was reached on the EU multiyear
budget for 2021-2027, the negotiations for which had faced many difficulties in recent
months, for an amount of €1,074 billion. Further, a recovery fund (Next Generation EU) has
been created. This is additional to the budget and introduces a pan-European recovery
financing framework that is unprecedented in the history of the EU. This fund will be financed
by the European Commission's recourse, on behalf of the Union, to the capital markets, for
a maximum amount of €750 billion between 2021 and 2026, i.e. it is temporary in nature.
The funds will be assigned to tackle the consequences of the COVID-19 crisis, both through
loans to the Member States (48% of the total) and through direct transfers (essentially the
remaining 52%). The gradual amortisation of this debt will run to 2058, through new EU own
resources.
To swiftly mobilise the aid, which will take the form of investment project financing and
structural reforms, in areas such as research, progress in digitalisation and combating
climate change, the European Commission will, before the European Council's October
meeting, submit proposals on how to accelerate and smooth procedures in the Member
States. According to the draft agreement, the legal spending commitments attached to the
projects included in Next Generation EU shall be made, at the latest, by 31 December 2023,
and the related payments will have to be made effective, at the latest, by end-2026. More
specifically, 70% of the transfers should be committed during the 2021-2022 two-year
period, with a country-based distribution factor that depends on the unemployment rate in
2015-2019, population and the country's per capita income. The remaining 30% must be
committed before end-2023, and the distribution factor will be adapted to incorporate more
directly the heterogeneous impact of the health crisis. Thus, the unemployment rate will be
replaced by a variable that will weight, in equal portions, the decline in GDP in 2020 and the
cumulative decline in GDP in 2020-2021.
In sum, the fund will enable, at least in part, a balance to be struck between the potential
and real financial divergences among the European partners. This is because it will benefit
from the positive externalities arising from joint action and it will serve to engineer a
coordinated exit from the crisis, based on common budgetary instruments. The financing of
the fund through Community debt will benefit from the favourable low-interest-rate
environment and will prevent this new debt being assumed by Member States individually,
under conditions which, in some cases, would be foreseeably more unfavourable than those
which are expected to be applied to this pooled instrument. Given the novel nature of the
instrument, its amount and the difficulties in reaching agreements in the EU on such
multi-faceted matters, I must say that the outcome is very satisfactory in terms of
underscoring the shared will to move the European project forward.
The challenge now is to convert these funds that will be made available to countries
into a fiscal impulse that accompanies and steers the recovery effort needed in our
productive system. In this connection it would be advisable to prioritise, in the short term,
public investment projects in innovation, technological capital, education and lifelong
learning, and projects that contribute to the transition to a more sustainable economy, in
line with the strategic guidelines recently laid down by the European authorities.
The fact that the recovery fund agreed by the Council focuses on medium and long-term
objectives means there is still a significant need in the short term to fund the Member States'
budgetary effort in combating the effects of the pandemic. Also, in the medium term it
remains necessary to equip the EU with an appropriate institutional framework to
address the asymmetrical effect of economic shocks, e.g. through the launch of a
common budgetary macroeconomic stabilisation capacity, a cyclical stabilisation function
or a pan-European unemployment insurance scheme. That would influence greater pooling
of resources and risks in the budgetary arena and would enhance the resilience of the Union
as a whole to negative shocks. Reducing the European economy's vulnerability to future
shocks will also call for continuing progress towards a full Banking Union and a
Capital Markets Union.
The necessary support of the European Central Bank
On this occasion, and unlike previous crises, the approval of the European recovery fund
will prevent the European response to the crisis in the euro area from resting exclusively on
the common monetary policy.
The European Central Bank (ECB) has deployed a range of emergency measures during this
crisis. These have involved, first, the extension of sovereign and corporate bond purchases
in the euro area, with the aim of improving financing conditions. Specifically, the ECB has
increased its pre-existing purchase programme and added a new emergency programme
currently worth €1.35 trillion (11.3% of euro area GDP in 2019) and which will last, at least,
until June 2021. One new feature is the fact that asset purchases under the new programme
are being made with a high degree of flexibility regarding their distribution over time and
across asset classes, and, in the specific case of public asset purchases, also as regards
the issuing countries. As a result, the Eurosystem is focusing its purchases there where they
are most needed at each point in time. The aim is to ensure the smooth transition of the
single monetary policy to all countries in the area and to head off the risks of financial
fragmentation. The ECB has also made its liquidity provision facilities more accessible to
the banking sector, in terms both of cost and volume, and it has relaxed the requirements
made of assets pledged as collateral, in order to smooth financing to households, firms and
the self-employed.
All these measures have been effective in alleviating the financial tensions generated by the
crisis. These tensions took the form of a strong rise in sovereign and corporate debt yields,
which were then largely reversed. The ECB's action has also helped keep bank lending flows
to companies notably robust in recent months and contributed to their cost holding at low
levels. Also crucial for these dynamics have been the government-implemented public
guarantee programmes for bank lending. The ECB measures have further provided
considerable room for manoeuvre for national authorities.
In this second phase of the crisis, in which the recovery in economic activity is, as I said,
incomplete, fragile and uneven across sectors in countries, actual inflation and inflation
expectations are holding at very low levels. And it is to be expected in the medium term that
the weakness of demand will continue exerting downward pressure on prices. Against this
background, on the ECB Governing Council we have made it clear that a high degree of
monetary accommodation is needed to support the recovery and safeguard our price
stability objective. Specifically, we have reiterated our commitment to do what it takes
to support the euro area economy in these extremely difficult circumstances. That
includes ensuring that the common monetary policy is properly transmitted to all sectors of
the economy and to all countries, and to prevent the financial fragmentation of the area. We
also stand ready to adapt all our instruments should it be necessary.
Naturally, we must also remain vigilant regarding the risks to financial stability. Evidently,
the banking sector is facing this crisis from a healthier position than in the previous
recession, which highlights the importance of the far-reaching changes made in this sector
over the past decade. The ECB has also taken resolute action here. Among other measures,
it has allowed banks to use the capital buffers available, which were created precisely for
situations such as the present one. But, undoubtedly, the crisis will significantly impact the
quality of banks' credit portfolios, on a scale that will depend on its ultimate severity and
which will be uneven across banks. The outcome will depend on banks' starting position,
on their business model and on the distribution of their exposures to the sectors and regions
most affected by the pandemic. Accordingly, we supervisors must continue to closely
monitor the risks to financial stability and we must be ready to provide a forceful,
panEuropean response should such risks materialise.
In short, European and national economic authorities must share the objective of preventing
the current crisis from being accompanied by an across-the-board tightening of financing
conditions or from seriously harming the stability of the financial system. We are well aware
that crises that incorporate a significant financial downturn are usually deeper and
longerlasting.
The health crisis will directly affect the profitability of the European banking sector. Such
profitability was already low before the crisis broke, and events have highlighted the need
to tackle even more urgently certain challenges, such as those associated with digitalisation,
the management of cybersecurity risks, reputational risks and those relating to climate
change. This underscores the importance of making further headway in improving banking
efficiency. Given the extraordinarily prevalent role played by this sector in the Spanish and
European economy, how successfully these challenges are resolved will notably influence
the intensity and sustainability of economic growth in the coming years.
The importance of an extension and selective adaptation of national stimulus measures
In the national economic policy arena, achieving the dual aim of supporting the recovery
and smoothing the adjustment of the economy to the post-pandemic scenario calls for two
actions. First, the authorities must extend and regularly recalibrate some of the
measures already applied, which will have to be more closely focused now on the groups
of firms, sectors and individuals most affected. And further, their design should enable
the structural adjustments needed ahead of the new post-pandemic environment to
be brought about.
Allow me to illustrate this idea in relation to two measures that have been particularly
important in recent months: the policies on guarantees and on ERTEs.
Indeed, the notable reduction in business activity further to the restrictions associated with
the state of alert prompted a much sharper decline in non-financial corporations' operating
revenue than that in the payments they must meet. The latest Central Balance Sheet Data
Office figures give an idea of the severity of this shock to firms' liquidity. There was a strongly
adverse impact on these agents' profits already in Q1, despite the fact that the sharp
contractions in activity and operating revenue associated with the declaration of the state
of alert only affected the last two weeks of this quarter. The reduction in the return on assets
for the overall sample of firms was so significant that it pushed ROA below the cost of
borrowing, a development not seen since 2014.
The information on bank lending shows firms resorting to this source of financing to cover
a large portion of these liquidity requirements. Specifically, the outstanding balance of bank
financing granted to Spanish non-financial corporations rose to 8.7% in May after having
shrunk by 1.1% year-on-year in February. And the preliminary data for June would suggest
that this trajectory has been holding in the most recent period.
Yet for financial institutions to have been able to meet such a notable increase in firms'
applications for credit, the contribution of the support measures launched at both the
European and national levels has been decisive. On one hand, banks have been able to gain
access to the ECB's long-term financing under most advantageous conditions thanks to the
purpose-built programmes introduced by the ECB. On the other, the public guarantees on
loans to firms and the self-employed approved by the Government have contributed to
lessening financial institutions' potential reluctance to take new risks on board in such an
uncertain setting.
Analyses by the Banco de España based on the evidence available suggest that these
guarantee facilities are, in particular, paving the way for the financing both of firms
facing greater difficulty gaining access to credit and of small enterprises, marked by
having been affected by the impact of the health crisis and for having a greater risk
profile. Thanks to the guarantees, SMEs have been able to finance themselves in recent
months under more favourable conditions in terms of the interest rate, the amount of credit
and, above all, the maturity of the operation, which on average has stood at close to five
years.
The role of lending to companies in the current crisis is thus proving to be of great
importance. It is contributing to reducing the risk of bankruptcy for firms that are viable but
which face temporary liquidity problems, with the adverse consequences this would have
in terms of job destruction and damage to the productive system, and, in sum, to the
robustness and momentum of the economic recovery.
The launch of the new ICO (Official Credit Institute) line of guarantees, recently announced
by the Government and worth €40 billion, will significantly reinforce at a most timely juncture
this important instrument for combating the economic effects of the pandemic.
Against this backdrop, the findings of the latest Bank Lending Survey anticipate the
possibility of a tightening of credit standards for European firms in Q3 this year. Should
this be confirmed, prolonged or increased support measures for the financing of firms
would be advisable, in order to sustain the recovery. In any event, in this second phase
of the economic policy response, credit support mechanisms should focus on prioritising
access to these funds for firms with sound viability prospects, with a view to providing for
the necessary cross-firm and cross-sector reallocation of productive resources.
Likewise, it is admittedly highly likely that a significant number of firms will emerge from this
crisis with high debt levels and with diminished demand prospects, at least for some time.
In this respect, it is also a pressing concern to review corporate restructuring and
insolvency processes, with the aim of establishing pre-emptive, flexible and simplified
administrative procedures enabling firms to pursue their business activity while they
are still viable.
The second decisive contribution of economic policies to alleviating the consequences of
the crisis has been the use of furlough arrangements (ERTEs). This has also been a very
important instrument for mitigating firms' liquidity needs. But, above all, it has been a key
tool for ensuring the maintenance of affected employees' income and for improving
the prospects of recouping employment once the restrictions on activity imposed by
the state of alert are lifted. The particular characteristics of this shock, which temporarily
shut down many workplaces, and the incentives approved for the use of this instrument
after the state of alert was declared have contributed to a much greater resort to ERTEs
than in past crises.
Hence, if we focus on the arrangements available for permanent employees, at end-April
the number of workers affected by an ERTE totalled 3.4 million. Since then, this figure has
fallen significantly. Moreover, on the information available, only a very small portion of
wageearners who have emerged from this situation have gone into unemployment or become
idle, whereas most of those affected have returned to their pre-crisis job. These
developments are qualitatively consistent with the objective pursued; namely, that ERTEs
would be a temporarily used tool while the transitory shutdown in activity lasted.
In late June, coinciding with the end of lockdown-easing, 1.8 million workers continued to
avail themselves of an ERTE. This figure is almost half the end-April peak and accounts for
close to 10% of total wage-earners, confirming that one of the characteristics of this
recovery is its incompleteness.
From the standpoint of the labour market, what we have is also an uneven recovery. This is
because the reduction in the number of workers on ERTEs has been very uneven across the
productive sectors. With lockdown-easing having concluded, some services segments are
still affected by restrictions on operating normally, and the proportion of workers affected
by furlough arrangements continues to be a majority. This is the case of the
accommodation, air transport and travel agency segments where, at end-June, the reach
of ERTEs was still between 70.4% and 53.7%. The very high proportion of workers
protected by an ERTE in these specific services segments is in striking contrast to the
percentages in manufacturing industry and construction (8.9% and 4.2%, respectively).
That highlights the deeply asymmetric effects of this crisis on different productive activities.
In absolute terms, at the end of Q2 almost half the workers on ERTEs were in the retail and
hospitality sectors.
In response to this situation and to the high uncertainty over the recovery, the ERTE
support measures - initially programmed to end-June - have been extended, albeit
with amendments, to the end of Q3. The new conditions include the possibility of
increasing Social Security exemptions in the event of a fresh outbreak of the virus, which is
an explicit acknowledgement of the uncertainty surrounding the recovery. These new
conditions also attempt to square the objective to continue providing support to firms and
workers temporarily affected by restrictions on operating normally with the aim of providing
incentives for a progressive reallocation of employment towards activities with a better
future outlook.
In parallel with the role of ERTEs, it is important to ensure the proper functioning of
the different labour flexibility mechanisms available to firms, whose function is
particularly useful in these circumstances for efficiently accomplishing the
adjustments arising from the crisis.
Active labour market and training policies for the unemployed and workers affected
by ERTEs also take on considerable importance. Once suitably re-designed, these
policies should be geared to boosting employability and smoothing the relocation of the
workers most affected by the crisis to sectors or firms with greater growth potential.
The criteria whereby support instruments are maintained, but after being appropriately
designed so as not to distort the necessary adjustments in the economy, are also important.
And particularly so those expressly intended to sustain the income of the most vulnerable
households.
The necessary implementation of an ambitious structural reform agenda
Let us look beyond the policies needed in this phase of incipient economic recovery. Taking
a broader view, the extraordinarily complex setting envisaged by the Banco de España's
latest economic projections - and those of the vast majority of analysts - for the coming
years also means we should define a reform agenda aimed at tackling the structural
challenges our economy faces, and which this crisis has made more pressing. In this
setting, an ambitious reform strategy would be an essential lever for positioning the Spanish
economy on a sustainable path of growth, job creation and well-being.
One of the key structural challenges is that relating to the need to increase our economy's
growth potential. Before the pandemic broke, Banco de España estimates had placed the
Spanish economy's growth potential slightly above 1% per annum. It is too soon to
accurately assess the scale of the damage the current crisis will cause to this potential
growth. But, unquestionably, the impact will be negative and, therefore, our growth capacity
looking ahead might be lower than that estimated before the crisis.
The main factor behind the Spanish economy's modest potential growth is, undoubtedly,
the low structural growth of total factor productivity. These differences should not be
underestimated, since productivity gains are a fundamental ingredient for achieving a
sustainable increase in a country's economic well-being. Indeed, the greater these gains
are, the greater the possibilities of raising wage levels and the quality of the jobs created,
along with increasing the resources for funding public policies.
It is thus necessary to address the various structural aspects which, across the board,
restrict productivity gains. In this connection, we must improve the quantity and quality of
public and private investment in human and technological capital, revise o