It is unusual to see the presidents of the country's two main banks delivering a common message in a matter of a few days: the Spanish economy will beat expectations. The president of BBVA, Carlos Torres, stated that GDP will outperform ‘all’ forecasts. In reality, this excludes ours at Arcano Economic Research because we have been arguing since January this year that Spain's growth in 2021 would be significantly higher than that forecasted by the consensus (then at 5.5% for this year, compared to our estimate of 8%; as of today the consensus is close to 6.5%). For this, we were labelled ‘optimistic’, when in fact we were being realistic.

What's going on?

First, many economic models forecast the end of recessions based on past contractions. The vast majority are recessions generated by ‘endogenous’ factors, such as a real estate crisis. This crisis is different, it is ‘exogenous’, caused by a pathogen. When society begins to overcome the pathogen, the economic situation, especially consumption, normalises much sooner than econometric models predict. That is why estimates are adjusted upwards (in the case of the US, economists have already been making upward revisions of more than 2% of GDP; they have gone from 4% to 6.5%, and will soon be at 7%).

Second, as we outlined last fall, the Covid-driven recession is far less severe than the great recession of 2008. This is because: (i) central bank stimulus has been much more intense than that of the great recession, (ii) money is circulating, unlike in the previous crisis, because this time the banking system is solvent and liquid (especially in Spain and that is why the money supply is growing at 6% compared to falls of 7% during the great recession), iii) the fiscal policy reaction has been much faster, more effective and more durable than that deployed in 2008, and iv) world trade, which represents about one-third of world GDP, has recovered in nine months, compared to more than twenty-four months in the previous recession.

Third, while Spaniards tend to save around 7% of our income, during the pandemic this figure has soared, either because of an inability to spend or because of precautionary savings. Excess savings amount to around 50 billion euros. This cushion, once mobilised, is what fuels economic expansion through consumption (which in turn accounts for two-thirds of national GDP), as we will explain in the subsequent section.

Fourth, and very importantly, in February we reported on how, despite disappointing initial vaccine receipts, there would be sufficient inventory to protect the most vulnerable population (those over 80 years of age) during March. Since this segment accounted for two-thirds of deaths, it was predicted that deaths would fall by at least this amount in April (they actually fell by 80%). From countries that were ahead of us in vaccination, such as Israel, the USA, and the UK, it could be inferred that when deaths fall sharply, social alarm is reduced, mobility and consumer confidence rise and consumption is activated, leading to surprisingly high economic growth. This is exactly what has been happening with the Spanish economy since April: i) consumer confidence has consistently risen since March, with future expectations indexes posting the second-highest rating in history (115) and ii) advanced credit card consumption data show that spending in April and May was 20% higher than in the equivalent months of 2019, before Covid.

Fifth, consumers who are watching Covid being left behind behave similarly in the various countries analysed: i) they consume more, as we have explained in the previous point, ii) they spend less on goods and more on services, which is key for an economy like Spain's, where four-fifths of its activity is linked to the service sector, iii) they buy more cars as they utilise public transport less frequently, which is especially relevant for Spain, as we export 80% of the cars we manufacture, and iv) they invest in real estate, which reacts with price hikes, not price declines, as was predicted with some alarmism a year ago: this factor boosts the real estate sector, which is imperative for employment and for confidence.

Sixth, the tourism sector is reactivated. Consumers decide to book trips when they are vaccinated, which causes an exponential recovery of the sector, since the delivery of vaccines is exponential, not linear (in March we were vaccinating 0.2% of the population per day, now 1%). As an example, the use of airports by North Americans is now only 27% below pre-Covid levels (it fell by more than 90%), and the number of airline reservations to Spain from other EU countries and reservations of Spanish hotel destinations are also undergoing exponential growth, as we have been publishing in various documents, while we vaccinate some 60 million Europeans per month. This exponential function linked to the rate of vaccination supports the thesis that the tourist season presents upside risks compared to the consensus assumption.

The analysis consists of trying to be objective in an emotional situation and make more or less accurate forecasts. In our opinion, the best methodology for forecasting economic recovery always involves a medical analysis, from which to construct growth forecasts. The precedents of Israel, the USA, and the UK are very useful and have shown another crucial factor to consider: to understand the evolution of the epidemic, it is not enough to measure the vaccinated population, we must also reflect the percentage of the population that has overcome Covid and that, therefore, in practical terms, has acquired natural immunity (the risk of symptomatic reinfection is residual). This factor, which we have been taking into account for a year now, significantly recalibrates our scenarios of pandemic evolution. According to our calculations, approximately one-third of Spaniards have natural immunity, adding this to the third of vaccinated people, and subtracting the third of vaccinated people who were already immunised, we have almost half of the population protected. This is much quicker than what was predicted by many models that only took into account the vaccinated population, and failed to take into account the exponential arrival of the vaccines.

Risks remain

Unquestionably, risks lie ahead. The most obvious is the creeping arrival of the delta variant, which will cause a two-month delay in achieving herd immunity. However, if our analysis is correct, the key to the economy lies not in herd immunity, but in the trend in hospitalisations, where the evidence is encouraging. However, one crucial piece of data is very clear: the Purchasing Managers' Indices (PMI). We have always maintained that in most cases these indexes, which basically show the real activity of companies, are excellent predictors of the economy. Considering that a PMI of 50 shows month-on-month growth neutrality, Spain's PMI for May is at 59, the second-highest level in history. 

 

                So Spain's economy outperforms expectations.