Spain finance warning: Madrid cuts economic forecast after EU rescue funds are delayed

The Bank of Spain announced on Tuesday that the country’s economy is likely to shrink by 0.4 percent this quarter after two straight quarters of recovery due to restrictions imposed to tackle the third wave of COVID-19 infections. The bank lowered its full-year growth forecast as the country awaits the EU’s Recovery Fund.

After a record 11 percent slump last year, the central bank expects gross domestic product to expand between 3.2 percent and 7.5 percent this year, with its central scenario pointing to 6 percent growth, down from 6.8 percent in its previous outlook released in December.

In the first quarter, its forecast ranges from a 0.9 percent contraction to a 0.4 percent expansion from the preceding three months, when Spain grew 0.4 percent, beating expectations.

Its central scenario is a 0.4 percent contraction.

A spokesman for the Bank said: “The impact of the third wave of the pandemic at the start of the year has cooled forecasts and shifts the upturn in economic activity to the second half.”

They added that business “reactivation” in March could still surprise positively.

Bank of Spain chief economist Oscar Arce told reporters: “In the second quarter we clearly see positive growth.”

He added the Bank is expecting “a strong rebound” in the second half of the year thanks to the coronavirus vaccination campaign that is likely to see most restrictions lifted by the end of 2021.

But the effectiveness of vaccines has dispelled some of the uncertainty, but it still remains high, he added, explaining also that private consumption will drive this year’s rebound, with a likely 8.8 percent increase thanks to savings accumulated last year.

A slower than expected absorption of EU rescue funds this year is also likely to weigh on growth, the spokesman said, but should boost investment during 2022.

Next year, the bank predicted GDP growth in a higher range of 4.6-5.5 percent than its previous forecast of 3.9-4.8 percent.

Still, the tourism-dependent economy will not return to its pre-pandemic levels until 2023, when foreign tourism numbers are likely to recover their 2019 peaks.

More to follow…

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