Spain was one of the worst-hit European countries during the global financial crisis of 2007-09. While eurozone GDP fell by just 1.9% between 2009 and 2013, Spain’s economy contracted by 8.9% – and 12 years on it remains vulnerable to economic shocks.

Just as Spain recovers from its crises of the previous decade, the coronavirus outbreak threatens to reverse this upturn. The government has announced a €200bn package to support companies, in what prime minister Pedro Sanchez has described as the “biggest mobilisation of resources in Spain’s democratic history” to fight the economic impact of the pandemic.

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Sensitive economy

With Spain one of the European countries worst hit by the Covid-19 outbreak, the government has taken measures to halt its spread by closing schools, museums, libraries, hotels and restaurants. However, structural vulnerabilities mean its economy is more sensitive than other countries to the effects of a lockdown.

“The impact of coronavirus will be particularly bad on Spain’s economy since it is a more cyclical economy than other OECD countries. Due to this cyclicality, I would expect a U-shaped, rather than V-shaped, recovery,” says Ignacio De la Torre, chief economist of financial advisory firm Arcano, hinting at a prolonged period of economic frustration. 

The coronavirus pandemic has hit Spain just as it would have been preparing for its summer tourism season. Being one of the world’s most visited countries, its tourism sector is vital to the economy, and accounts for 15% of its GDP. Mr De la Torre suggests GDP could contract more than 10% in the three months following the announcement of lockdown on March 14.

“Additionally, the sharp contraction expected in global trade is more damaging to exporting countries such as Spain,” he says. “Spain exports 34% of its GDP in goods and services, which is more than France, Italy, the UK, the US and China.” For this reason, unemployment may edge back up from an already high 14% to at least 20%, he adds.

The reign of Spain

An analysis of the Spanish economy before the coronavirus outbreak would show it had recovered from recession to become one of the main contributors to eurozone growth, following six years of consecutive GDP growth from 2013 to 2019.

The country sourced a record 642 greenfield projects in 2019, topping the previous record of 555 in 2018, according to greenfield investment monitor fDi Markets. 

“Spain has aroused great interest in the international investment community in a context in which FDI has been falling in the world,” says Maria Jesús Fernández, executive director of Spanish government investment promotion agency ICEX.

Spain’s record-breaking year for inbound greenfield FDI was partly driven by its flourishing real estate sector, which attracted a record 101 investment projects in 2019. “The presence of international investors in the Spanish real estate market has been critical for this turnaround story,” says Mr de la Torre.

Arturo Diaz, head of residential at property agent Savills Aguirre Newman, says: “During the past few years, international investors have become increasingly involved with local developers in the development of residential projects. The international investor provides the financial capacity, while their local partner in Spain, the developer, provides the market expertise.” 

Is technology the answer?

Although tourism, real estate and the automotive sector make up about 30% of Spain’s GDP, technology might be the driver for its next economic push. “As the war for tech talent has gone global, landlords are delivering new, highly specified, energy-efficient buildings. These appeal to high-growth businesses and encourage them to headquarter in Madrid,” says Ben Forster, an equity analyst at investment manager Schroders.

There has been a surge of investment in tech companies in Spain’s major cities, as leading firms are attracted to their vibrant ecosystem of skilled graduates, an impressive infrastructure that includes high-speed train and motorway networks, appealing offices and value for money.

“Spain has a high-quality education system and is full of incubators and accelerators for digital companies,” says Ms Fernández at ICEX. Barcelona and Madrid rank in the top five for quality among European cities, and make up the top two for cost, according to fDi Benchmark, a Financial Times assessment tool that compiles data on factors influencing investment decisions.

Financial services gains 

Spain’s financial services sector was also benefiting from the so-called ‘Brexit boost’. Large companies including Goldman Sachs, JPMorgan and Barclays announced relocations from London once it became known that they would lose their right to sell financial services to clients in the EU from the UK. While in 2019 the UK experienced a year-on-year decline in this sector, Spain had particularly strong growth and achieved a record number of project inflows.

It took years for Spain to recover from the financial crisis. Despite the lingering risk of political implosion it appeared that the worst was over and the engines of the national economy were gearing up again, thanks to a restructured financial sector emboldened by Brexit, booming tourism and real estate industries, and growing tech ecosystems in its top cities.

Everything has come to an unexpected, grinding halt as the coronavirus crisis hit and the cyclical nature of the economy may mean a long recovery period ahead. But Spain has come back stronger from previous crises, and its economic ambitions, embodied in projects such as Madrid Nuevo Norte – one of the biggest urban regeneration projects in Europe – will be revived as soon as the short-term health emergency is over.

This article first appeared in the April-June edition of fDi Magazine. The full digital version of the magazine is available here