GDP falls again in first quarter and government raises deficit forecast for this year

On Friday, the Spanish government worsened the public deficit forecasts for this year. The Minister of Finance, María Jesús Montero, explained that according to the new estimate, the deficit will increase to 8.4% of the GDP. They are seven tenths more than what was initially planned in the general state budget. Montero has advanced the new stability plan, which will be sent to Brussels this Friday along with the recovery and resilience plan. The final document of the plan - which is 2,000 pages long and is therefore much more extensive than the preliminary document published on 13 April - will not yet be made public.

Pedro Sánchez's government estimates that Spain's accounts will not close with a balanced budget until 2024, when the deficit will stand at 3.2%. Montero stressed that the data could be improved because the figures presented do not take into account the impact of the measures being negotiated with the social partners, such as the labour, pension and tax reforms. According to the 2020 macroeconomic data update, the pandemic year closed with a public deficit of 10.1%, below the 11.3% that had been forecast.

The worsening of the deficit forecast for this year has to do with a worse start of the year than what had been predicted. The Spanish economy fell by 0.5% the first three months of the year and returned to negative values after the impact of the third wave of the covid-19 pandemic. According to data published on Friday by the National Statistics Institute, the Spanish GDP fell between January and March due to the decline in consumption and investment, a situation that has much to do with the restrictions of the pandemic and other factors such as the Filomena storm.

Data that invite to "optimism"

Nevertheless, Montero stressed that there are data that invite to "optimism" and a "change of trend" can be perceived that will lead to an increase in economic growth, especially during the second half of the year. Montero confirmed that the GDP growth forecast for this year is 6.5%; by 2022 the GDP will increase by 7%; and from 2023 economic growth will moderate. The government forecasts an increase of 3.5% in 2023 and 2.1% in 2024. Unemployment will gradually decline to 12.7% in 2024.

As for the year-on-year rate, the GDP fell in the first quarter at a much slower pace than in the fourth quarter of 2020. Specifically, the Spanish economy contracted by 4.3% year-on-year, while in the previous quarter the year-on-year decline had been 8.9%. With this data, there are now five consecutive quarters of negative year-on-year rates since the start of the pandemic.

The data published by the INE worsen the forecasts that the Bank of Spain had made for the first quarter of 2021. The agency had already cut its forecasts, but calculated that there would be a 0.4% relapse of the GDP, which has ended up being a tenth more. Even so, the INE also warns that this leading indicator is put together with information up to February and that, therefore, the statistics could change due to the rapid evolution of the pandemic.