MADRID (Reuters) – The International Monetary Fund said on Friday that Spain’s economic contraction may be less severe in 2020 than the 12.8% it predicted earlier this year thanks to a strong rebound in the third quarter after the impact of the COVID-19 pandemic.
The fourth quarter could, however, still undermine growth projections for 2021, the IMF said in a report, adding that the outlook was “highly uncertain”. It said available data pointed to a slowdown or even a reversal of growth in October-December from the third quarter.
While gross domestic product expanded 16.7% in the third quarter from the second, the economy is still 8.7% smaller than a year ago.
With more than 1.4 million infections and a tourism-dependent economy, Spain has been one of the hardest-hit countries in Europe by the pandemic.
The IMF also said that banks’ profitability and lending capacity could deteriorate as bad loans would likely rise “disproportionately” in Spain’s non-financial corporate sector upon the expiration of some borrower support measures.
It recommended that the government prioritise targeted equity support to viable firms, underscoring that without these and other measures, “social losses” stemming from the collapse of companies may prove too costly.
The Spanish government expects a record 11.2% economic contraction this year and a rebound of at least 7.2% next year.
IMF Mission Chief for Spain, Andrea Schaechter, said the 2020 drop should now be closer to the government’s forecast.
But the IMF said that the government’s macroeconomic outlook in the draft 2021 budget, which projects growth of up to 9.8% next year with the use of EU recovery funds, was “optimistic”, mainly because the IMF expects a somewhat slower absorption of the funds than the government does.
Instead, the IMF expects 7.2% growth for 2021.
“In addition to the EU funds impact, the evolution of the pandemic will shape the recovery. A weaker-than-projected fourth quarter GDP outturn would make the projected 2021 real GDP growth difficult to achieve,” the IMF said, citing possible further tightening of pandemic containment measures as a risk.
“Policies need to continue to mitigate the risk of the recession morphing into financial sector stress with even higher real and social costs,” it added, adding that Spanish banks could suffer more than some others in Europe due to a higher exposure to the hard-hit hospitality sector.
(Reporting by Belen Carreno and Jesus Aguado; Writing by Andrei Khalip; Editing by Ingrid Melander and Pravin Char)