Business 15/07/2021

Airef warns new wave endangers return of tourism and economic recovery

Growth forecast for 2021 stays at 6.6% while deficit increases by one tenth, to 7.9%

4 min
Two tourists on the Rambla in Barcelona this June.

Madrid/BarcelonaThe new wave of covid-19 has put Catalonia on alert and has left Spain in red on the European map of covid contagion may slow down the arrival of tourists and delay economic recovery. The Independent Authority for Fiscal Responsibility (Airef) warns of the dangers to the economy of increased infections in the middle of the tourist season, which in the case of Catalonia come accompanied by new restrictions. "The incidence of coronavirus in Spain is higher than that of the surrounding countries, a fact that harms the expectations of future developments in tourist flows," says Airef in the report published on Thursday.

Airef had already warned months ago that tourism would not fully recover until 2022, but progress in vaccination and a gradual return to normality had raised expectations and the sector was confident. Airef now says the new wave "endangers" the arrival of international tourism, "one of the pillars on which the Spanish economy is based. According to sources in the agency chaired by Cristina Herrero, the situation threatens "a slower economic recovery," especially because in the case of Catalonia there are new restrictive measures that may also affect domestic tourism and sectors such as nightlife. Even so, Airef assures that it still does not have enough data to calculate the impact of the new wave of contagions on tourism and economic growth.

The warning coincides with the update to the EU's map of covid contagion, in which Catalonia has gone to dark red, indicating it is a high risk area.The EU strongly advises against travelling to Catalonia and an increasing list of countries discourage from travelling to Spain or have imposed tougher restrictions on returning travellers. This has had a knock-on effect on cancellations for the coming days. France announced on Thursday that it will demand a negative covid test 24 hours before returning to the country from Spain for unvaccinated people and not 72 hours as up until now. This Thursday, the Netherlands removed the Balearic Islands and the Canary Islands from the list of safe regions, and recommend avoiding travelling there due to the high incidence. The United Kingdom also struck the Balearic Islands off its safe destination list, only a few weeks after including them. Unvaccinated British citizens travelling to Mallorca, Menorca or Ibiza will have to quarantine on their return to the UK.

Delay in bookings

On the ground, in Catalonia the impact of the fifth wave of contagion and the new restrictions on the tourism sector is still uncertain. The measures announced by the Generalitat are not yet in force and businessmen do not know the fine print. In addition, the announcements have been happening throughout this week, so it has not yet had a significant impact on bookings and activity. On the other hand, in the Balearic Islands hoteliers fear early departures of British citizens who want to avoid the obligation to quarantine, which does not come into force until Monday. The Hotel Business Federation of Mallorca (FEHM) believes that the decision of the British government will mean "a decline in bookings, in addition to cancellations and possible early departures".

According to employers association Foment del Treball, the sector has noticed a "deceleration in sales", but still has not suffered an increase in cancellations. Sources in Foment del Treball assure that "the season is going well" and that at the moment the news about curfews have not affected the sector much, although the concern exists, since the announcement of closures of nightclubs, restaurants and other activities can put many visitors off, especially from abroad.

In the same vein, the other Catalan employers association, Pimec, warns that, although there are few cancellations, reservations are being delayed in time compared to other seasons. The uncertainty means tourists wait until the last minute before deciding where to go on holiday and the new measures of the Generalitat have increased this uncertainty.

Slight increase in the deficit

In its new report of macroeconomic forecasts, the Airef does not make outstanding revisions of the main indicators because of the great uncertainty that exists at the moment and because there are contradictory indicators. While the economy seems to recover faster than initially expected in the second half of the year, the pace of contagion may slow the good evolution of economic activity. In addition, the fiscal authority also points to the possibility that the impact of European funds for this year is less than initially estimated, but explains that it does not have enough information. Given these uncertainties, the agency prefers to wait in autumn to review its estimate.

Airef maintains, therefore, its growth forecast for the economy for this year at 6.6% of GDP and only raises its forecast for public deficit by one tenth, to 7.9%. Despite the increase, the forecast remains below that of the Spanish government, which calculates a deficit of 8.4% for 2021. The increase in the forecast deficit is explained by the impact of the lower VAT on electricity recently approved by the Spanish government to deal with the rise in the price of electricity, and by a lower than initially expected absorption of REACT-EU funds by the Spanish regions.

These two factors have been compensated to a large extent by the higher than expected collection in the first half of the year - thanks, among other factors, to the €1.1bn collected through corporate tax from the merger of CaixaBank and Bankia - and because the executive has delayed until 2022 the compensation for the revaluation of pensions below real inflation (about €700m).

Catalonia will maintain its deficit forecast for this year at 0.4% of GDP, one tenth less than regions' average. Airef believes that part of this year's expected revenue from REACT-EU funds will be carried over to later years, a fact that could lead to an increase in the deficit in 2021. But the situation is offset by other factors, such as the increase in revenue not initially expected from the transfer of the State for the financing of the Mossos d'Esquadra.

Fiscal consolidation

The Airef has returned to ask the Spanish government - as has the Bank of Spain - to design a roadmap for fiscal consolidation in the medium term and has warned that the high public debt, 112.4% of GDP, places the Spanish economy and the sustainability of regions in a position of "vulnerability". Sources in the agency have revealed that Pedro Sánchez'd executive has refused to listen to its recommendation.

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