As the global economic recovery seems to have peaked, the magnitude of the hangover is becoming visible. Indeed, one should not be fooled. A recovery of GDP with deficit, debt and unemployment levels like the ones we are witnessing usually does not end well.
However, let’s start at the beginning: Why is the recovery bottoming out?
The United States
Until now, the United States have been propping up the world economy, helping the entire developed world to achieve better economic statistics thanks to sustained domestic demand and the resulting rebound in international trade. It was one of the countries least impacted by Covid-19 and the closest to a “V” recovery.
This to the extent that the U.S. are the second developed economy to already recover its pre-crisis GDP levels, after China. Then does this mean that the future is as bright as it has been? Such a scenario can hardly be taken for granted, given the following indicators:
- Forward indices of economic activity, especially in the services sector, have peaked and show slight downward corrections.
- There is negative credit growth which has not been seen since the 2008 crisis.
- The number of new jobs has been below the figures expected by the consensus among analysts for four of the last six months.
- There are also a whole series of short-term indicators that are already showing a change in the trend. Here, I am referring to retail sales, new home sales (which fell by 6.6% in June, compared to the +3% increase), vehicle sales, etc.
Does this mean that the U.S. is going to see a return to negative GDP growth? No. It does mean that growth figures are likely to be much weaker, especially if we put them in the context of Biden’s fiscal stimulus program and the growth of the Fed’s balance sheet, which is now already accounting for 37% of GDP.
Exactly the same is true for China: GDP growth (+7.9% year-on-year) is lower than what was expected and both credit growth and economic indicators are very weak.
Everything seems to indicate that the economic engine for 2021 will continue to be the United States, although Europe is expected to take the lead in terms of momentum in the coming months.
Germany is the main surprise in the Old Continent, as it has recorded the highest levels of activity in the developed world – especially in the industrial sector – while its labor market is recovering faster than in other European countries.
It is worth remembering that labour flexibilization in Germany was performed through a reduction in the hours worked, and not trhough job losses, like in Spain (where the temporary job retention scheme was called “ERTE”). In any case, the German unemployment rate of 3.7% is only 6 tenths above the minimum recorded before the crisis and the maximum during the Covid crisis (4%) is half of that recorded in 2008.
Everything seems to indicate, therefore, that the European upturn in the last part of the year will come fundamentally from Germany, which has handed out most support to corporates and which implemented the largest tax cuts in the whole of Europe in 2020.
In any case, what the summary of the OECD’s economic indicators reflects is that we are entering a new stage of economic stabilization and that growth statistics will no longer be as positive as they have been so far.
Spain, for its part, has been one of the last countries to jump on the recovery bandwagon. The latest employment and economic growth data are positive, but very poor.
Employment figures have not recovered to 2019 levels (without taking into account the ERTEs), and the number of unemployed is 10% higher than during the second quarter of 2019. Spain recording, quarter after quarter, one of the highest unemployment rates in the entire European Union, can hardly be considered a success.
Also the projected Spanish economic growth rate of 6.5% in 2021 can hardly be considered a success. If this figure is actually achieved, it would be similar to U.S. growth, with one tiny difference: the U.S. economy shrank with 3.5% in 2020 and Spain with 10.8%. Three times more.
Indeed, it is not certain Spain will even achieve this growth, because of a number of risks, including the fact that Spain remains one of the few countries where the situation in the financial markets is becoming more complicated, even if at the moment, this is still a marginal risk.
The Spanish Government’s own predictions – which, as we all know, are usually optimistic – foresee that tourism for the international market will have risen with 50% compared to 2019 and with 75% for the domestic market. We will need to see the actual impact of these figures on the tourism sector and, above all, on the labor market.
As the private sector in Spain is shrinking, its public sector is getting ever bigger
Entrusting the public sector to generate growth was never a good recipe. There’s the experience of 2008, or that of countries such as Argentina. Increasing government spending with European funds and continuing to record one of the highest budget deficits in the entire European Union – 8.8% of GDP, according to the Minister of Finance herself – is a path to the abyss, especially when the slowing recovery also reaches Spain.
We must generate real economic growth in Spain, and to do this, the most important thing is to create employment in the private sector. The excuse of the pandemic can no longer be used. While there are countries that have already recovered the levels of wealth prior to Covid19, in Spain, there are 42,000 fewer companies registered with the Social Security. Also innovating digital companies, such as Deliveroo, are unveiling plans to pack their bags to leave the country, following new labour regulations.
In Spain, we have witnessed a brutal destruction of employment. Even if this happened rather silently, it is therefore not less worrying. The data are clear: If we take into account the people who are in ERTE, the self-employed that are collecting special benefits for having terminated their activity and the brutal increase in the public workforce during the last year of the pandemic, the result is that in the Spanish private sector, 580,000 jobs have been destroyed, compared to pre-pandemic levels, and 860,000 jobs compared to the levels of two years ago.
This means 900,000 Spaniards have lost their jobs. Those that have been lucky, will have found a job in the public sector. Those that have not, will be among the more than 300,000 that have joined the INEM lists or, simply, left the labor market.
That is the situation in Spain under socialist PM Pedro Sánchez: a place where investment is scared away, where companies are mistreated and where middle-class employment is destroyed.
Originally published in Spanish by Libre Mercado