Spain: Economy swings back to contraction in Q1 amid tighter restrictions
The economy fell back into contraction in the first quarter of 2021, as the tightening of restrictions amid another wave of Covid-19 infections weighed on domestic activity. According to a preliminary reading, GDP shrank 0.5% on a seasonally-adjusted quarter-on-quarter basis in Q1, following the flat reading logged in Q4 2020.
A deterioration in domestic demand drove the first quarter’s downturn. Consumer spending dropped 1.0% on a quarterly basis, significantly below the flat reading logged in Q4 2020, as tighter containment measures led to a scaling back in business activity and household purchases. Moreover, fixed investment declined 1.9% quarter-on-quarter as tangible fixed assets and residential investment retreated, likely due to heightened economic uncertainty (Q4 2020: +1.0% s.a. qoq). Meanwhile, government spending continued to increase, growing 0.5% from the prior quarter (Q4 2020: +1.3% s.a. qoq).
Meanwhile, the external sector made a positive contribution to growth, although this was due to imports falling at a sharper pace than exports. Exports of goods and services dipped 0.1% (Q4 2020: +0.1% s.a. qoq) as rising infections across Europe triggered the reintroduction of containment measures and sapped demand in turn, with the vital tourism industry continuing to suffer. Imports, meanwhile, were down 1.3% in quarterly terms (Q4 2020: +6.2% s.a. qoq), further highlighting weakened domestic demand. Taken together, net trade made a contribution of 0.4 percentage points to GDP growth.
Looking ahead, the economy should recover some of 2020’s losses later this year, benefiting from unleashed consumer and capital spending, incoming EU funds and reviving external demand amid easing restrictions. However, a number of downside risks persist, including a bumpy vaccine rollout, a likely subdued summer season, financial instability associated with high public debt levels and uncertainty over government policy reforms.
Commenting on the economic outlook for Spain, Angel Talavera, head of European economics at Oxford Economics, highlighted:
“As the health situation improves and the vaccination process gathers speed, we anticipate a recovery to start in Q2 and a more marked rise in Q3, once a larger number of restrictions can be rolled back, but the summer season will be key to determine the magnitude of the rebound. Prospects for H2 and beyond will also be boosted by a large amount of fiscal stimulus once EU funding starts to be deployed.”
The INE will release a second GDP estimate for Q1 on 24 June.