ECONOMIC GROWTH

Spain has experienced a balanced economic recovery in recent years; However, in

2020, the COVID-19 crisis caused an unprecedented recession in the country's
economic activity. with the steepest decline among EU Member States. Even
though the confinement restrictions still in force weighed down the economy in the
first half of 2021, it is estimated that the GDP of Spain has grown by 5.7% in the
year (IMF). Tourism-related activities supported the recovery and private demand
was the main driver of growth. Spain is expected to continue growing in 2022
(6.4%), returning to pre-pandemic levels in early 2023 (Doménech et al., 2022).
The EU's recovery and resilience plan is expected to boost public and private
investment, as it is household consumption is expected to remain strong during the
final forecast period.

Graphic 1 Spain GDP

Source: Own elaboration, Santander Trade data

Spanish public finances have deteriorated rapidly due to the COVID-19 pandemic
and the measures taken to contain its impact: in 2021 the general government
deficit amounted to 5.1% of GDP. As most of the measures expire, the deficit is
expected to follow a downward trend from 2022 (4.4% of GDP this year and 4.3%
in 2023) (Pedauga, Sáez and Delgado-Márquez, 2022). On the other hand, after
rising by nearly a quarter in 2020 (to 119.9%), the debt ratio rose only slightly in
2021 (120.2%) and is likely to fluctuate around 116% over the period. forecast
thanks to the economic situation. Growth and control of total current expenses.
Against the background of rising energy prices, headline inflation stood at 2.2% in
2021, despite certain government measures (notably lower VAT rates). The
sluggishness of the Spanish labor market should help contain wages and
inflationary pressures, with inflation moderating to 1.6% this year and falling further
to 1.4% in 2023 (IMF forecast).

UNEMPLOYMENT

Before the outbreak of the health crisis, Spain had an unemployment rate of
13.8%. By the end of 2021, that figure had fallen to 13%, making it one of the few
OECD countries to transform the labor market faster than the virus traces. In fact, it
is the fifth country with the largest reduction since February 2020, only surpassed
by Greece, Turkey, Lithuania, and Australia. On the other hand, despite eight
consecutive months of decline, unemployment is still above 5.5% in February 2020
in all the countries of the organization, although only by one tenth of a percentage
point (5.4% ) (Sanabria, 2022).

Graphic 2 Spain Unemployment

Source: Own elaboration, Santander Trade data

Spain continues to be the OECD country with the highest unemployment rate. In
fact, only two other countries have similar numbers: Colombia and Greece, with
rates of 12.6% and 12.7%, respectively. On the other hand, the Czech Republic
and Japan, which still had higher unemployment rates in December than before
Covid, are below 3%. Youth unemployment is another of Spain's pending concerns
since it is the country that pays the most in the region with 30.6% in December
(Pedauga, Sáez and Delgado-Márquez, 2022).

On the other hand, Japan, which occupies the best position in this area, closed
2021 with an unemployment rate of 5.2% among those under 25 years of age. In
the OECD, the average was 11.5%, three tenths less than in November. This is a
faster fall than that of adult workers, whose rate went from 4.7% in November to
4.6% the following month.

INFLATION

Spanish households had to tighten their belts again in 2021, especially from the
second half of the year, to reach the end of each month. And it is that COVID-19
and the increase in energy and fuel prices have catapulted average annual inflation
to 3.1%, the highest since 2011. A similar trend is observed in the interannual
variation of the CPI, which it rose in January 2021 to 6% (Serra et al., 2022).
 Graphic 3 Spain Inflation

Source: Own elaboration, Santander Trade data

According to statistics, the year-on-year increase in the CPI to 7.4% for February
2022 is due to "generalized" increases in most of its components, among which
food and non-alcoholic beverages and fuels stand out. such as the behavior of
electricity prices, which fell less in February than in the same month of 2021
(Echarte Fernández et al., 2022).

INVESTMENT - FDI

After falling due to the financial crisis, Spanish direct investment has recovered in
recent years thanks to increased competitiveness and investor confidence in the
country. Despite the outbreak of the COVID-19 pandemic that has hit the Iberian
state hard, FDI inflows increased slightly from USD 8.5 billion in 2019 to USD 9
billion in 2020, according to the World Investment Report published by UNCTAD
2021. The stock of FDI reached USD 853,000 million (Cos, 2022). FDI inflows
increased mainly due to various acquisitions, including US private equity firms
Cinven, KKR and Providence, which bought 86% of telecom company Masmovil.
Investments in Spain are mainly focused on the financial and insurance services,
information technology, manufacturing, construction, and transport and storage
sectors. Switzerland, the United States, the United Kingdom, France, Germany and
Italy account for more than 60% of Spain's FDI stock (Doménech et al., 2022).

Graphic 4 Spain Investment

Source: Own elaboration, Santander Trade data

According to the latest figures from the OECD, FDI inflows to Spain reached 6.6
billion dollars in the first half of 2021, compared to 17 billion dollars in the same
period last year. 60.2% of these investments went to the Community of Madrid,
followed by Catalonia with 19.1%. The main sectors were telecommunications
(21.6%), supply of electricity, gas, steam and air (20.8%); real estate activities
(6.2%); Sports, leisure and entertainment activities (5.3%) and financial services,
excluding insurance and pension funds (5.2% - Department of Commerce and
Industry) (Echarte Fernández et al., 2022).

The country's strengths in attracting foreign direct investment include a

restructured financial sector, booming tourism, its highly efficient transportation
network, renewable energy development, and cultural proximity to Latin America,
where many Spanish multinational companies have a presence. In addition, Spain
aspires to become one of the main world players in research (Cos, 2022). On the
other hand, the country has high public and private debt, a very negative net
external position and high structural unemployment. Since 2020, Spain has
suspended the FDI liberalization regime. Government approval is now required for
direct investment of more than 10% of the capital of a Spanish company by
residents of non-EU or EFTA countries (including the UK) in certain sectors, such
as reviews of infrastructure and technology, media, and food security. Spain ranks
30th out of 190 countries in the latest edition of the Doing Business report
published by the World Bank, stable compared to last year (Molina, 2022).

PLUBLIC FINANCES

The Spanish public debt is immersed in two parallel phenomena: on the one hand,
it registers levels never seen before when we see in cash what the public
administrations owe. In contrast, the debt-to-GDP ratio, the most reliable indicator
of a country's ability to service its debt, is still below all-time highs, set in May when
it topped 125% of GDP. In September data from the Bank of Spain, the amount
increased in absolute terms by 12,885 million euros to 1,432 million, a figure that
represents 122.1% of Spanish GDP (Romero Huedo, 2022).

The high level of indebtedness has become one of the worst legacies of the
pandemic. The States have prioritized safeguarding the structure of companies
and the jobs that accompany them, even if that means that their liabilities
skyrocket, and the European Central Bank has made it possible to curb the interest
they pay, an economy that struggles over time multiplies the problems at the height
of the debt crisis, when the price Spain paid for its self-financing was very different.
the government debt ratio would show modest declines on the horizon temporarily
planned to be the case in 2024 still very high (113.5% of GDP, in some 6 pp below
2020 levels) (Esteve and Prats, 2022).
 Graphic 5 Spain Debt

Source: Own elaboration, Santander Trade data

Public spending has skyrocketed in Spain due to the Covid crisis. The government
has used fiscal policy as a contingency tool to try to minimize the damage caused
by the crisis and reduce the depth of the recessionary cycle. The risk now is that
part of this emergency spending becomes permanent, adding to the structural
deficit of the Spanish economy, which was already one of the highest in Europe
before the crisis. It seems to be a trend that not only threatens public budgets but
also other sectors of the economy. There are fears that the inflation caused by the
pandemic will become permanent or certain changes in consumer behavior will
also become chronic (Cos, 2022).

EXTERNAL TRADE

Spain is open to foreign trade, which represented 60% of its GDP in 2020 (vs. 67%
last year - World Bank). Spain mainly exports automobiles (10.1%), medicines,
petroleum products other than crude oil, and vehicle parts; It imports crude oil
(5.5% of total imports), automobiles and vehicle parts, medicines, telephones, and
petroleum gas.

Graphic 6 Spain External Trade

Source: Own elaboration, Santander Trade data

According to data from Comtrade, the main destinations for Spanish exports in
2020 were France (15.4%), Germany (10.8%), Italy (7.5%), Portugal (7.3%) and
the United Kingdom ( 6…%). while imports came mainly from Germany (11.8%),
China (10.2%), France (9.9%), Italy (6.2%) and the United States (4.9%). The
country's goods trade balance is structurally negative due to high imports of fuels
and high value-added goods; although trade in services is generally positive (Pham
and Sala, 2022).

In 2020, Spanish exports and imports have been greatly affected by the global
crisis caused by the COVID-19 pandemic. WTO figures show that exports of goods
fell 8% year-on-year (to $307bn), while imports fell 12.8% (to $325bn). Services
trade followed a similar trend, with exports almost halving (-42.7% year-on-year) to
$89.6bn and imports at $60.2bn (-29.5% year-on-year) (González-Val, 2022).

Graphic 7 Spain Trade Balance

Source: Own elaboration, Santander Trade data

In the same year, the country's overall trade balance was positive (nearly 1.5% of
GDP, compared to 2.9% the previous year - World Bank). According to the latest
available data from the Spanish National Institute of Statistics, in the first ten
months of 2021 exports of goods increased by 21.1% year-on-year to 258.6 billion
euros, while imports increased by 22.1% year-on-year. Year. , to 275,300 million
euros. In terms of volume, exports increased by 13.3% and imports by 12.7% in
one year (Santander Trade, 2022a)

ECONOMIC SECTORS

Agriculture contributes around 3.1% to Spain's GDP and employs 4% of the active
population (World Bank, latest available data). The country is home to nearly one
million agricultural and livestock farms covering 30 million hectares. Spain is the
world's leading producer of olive oil and the third largest producer of wine in the
world. The country is also one of the largest producers of oranges and strawberries
in the world. The main crops are wheat, sugar beet, barley, tomato, olive, citrus,
grapes, and cork. Livestock is also important, especially pigs and cattle (Santander
Trade, 2022b).

The industrial sector represents 20.4% of GDP and employs a fifth of the active
population. Manufacturing is the largest industry and accounts for about 11% of
GDP alone (World Bank). The industrial sector is dominated by textiles, industrial
food processing, steel, shipbuilding, and mechanical engineering. New industries
such as electronic component production outsourcing, information technology and
telecommunications offer great growth potential. The renewable energy sector is
also growing at a good pace (Santander Trade, 2022b).

Graphic 8 Spain Sector Economic

Source: Own elaboration, Santander Trade data

The tertiary sector contributes 67.8% of GDP and employs 76% of the active
population. The tourism sector is fundamental to the country's economy as it is
Spain's main source of income (although its contribution to GDP has fallen from a
pre-COVID level of 12.4% in 2019 to just 5.5% in 2020). – INE). popular tourist
destination in the world (83.7 million tourists in 2019, before the start of the
pandemic). The banking sector is also important and is made up of twelve banking
groups, including 51 private banks, 2 savings banks and 60 cooperative banks
(Santander Trade, 2022b).

HOUSING

The year 2021 ended with record figures in wealth transfers, updated monthly by
the National Institute of Statistics (INE). December data released Tuesday brought
the number of home sales to 565,613 transactions last year, nearly 35% more than
in 2020 and the largest absolute volume since before the 2007 epidemic. The
financial crisis was then signed around of 775,000 transactions, a number that fell
to a 2013 low of 312,500 (González-Val, 2022). In 2020, real estate prices in the
country recorded an increase of around 27% compared to the base year, i.e. h
2015. Compared to 2019, real estate prices increased by 2.1%.

Graphic 9 Housing Price Spain

Source: Statista https://www.statista.com/statistics/772550/housing-price-index-in-spain/

FORECASTS AND RISKS

Spain is the 14th economy in terms of GDP volume. Its national debt in 2020 was
1,345,784 million euros, with a debt of 120% of GDP, it is among the most
indebted countries in the world in relation to GDP. Its debt per capita is 28,393
euros per capita. The last annual variation rate of the CPI published in Spain was
on February 2022 and it was 7.6% (Santander Trade, 2022b).

Spain stands out for being among the countries with the highest unemployment
rate in the world. Some variables can help you get more information when you
travel to Spain or just want to know more about the standard of living of its
residents (González-Val, 2022).

The GDP per capita is a very good indicator of the standard of living and in the
case of Spain it was 25,410 euros in 2021, which ranks 33rd out of 196 countries in
the classification of GDP by population. As for the Human Development Index or
HDI, created by the United Nations to measure the progress of a country and that
ultimately shows us the standard of living of its inhabitants, it indicates that
Spaniards have a good quality of life (Santander Trade, 2022b).

If the reason for visiting Spain is business, it is useful to know that Spain ranks
30th out of 190 in the Doing Business ranking, which classifies countries according
to the ease they offer to do business. Regarding the index of perception of
corruption in the public sector in Spain, it was 61 points, which means that
residents have a low perception of corruption in government.

In the medium term, it is necessary to monitor the imbalances that occur in certain
segments of the supply and the evolution of the prices of raw materials to
anticipate pressures on production prices that will eventually be transmitted to
consumer prices. Some of these supply constraints are reflected in ocean freight
costs, which have doubled since March, although they are still a long way from
2004 and 2008 levels. In addition, certain economic surveys such as the PMI in
recent months suggest that there are delays in shipments of goods and shortages
of intermediate materials, driving up production costs which appear to have been
absorbed by profit margins for the time being, but in consumer prices can be
carried over to the following month (Serra et al., 2022).

The increase in inflation expectations and the consequent increase in long-term

interest rates caused the value of the bonds to fall. In this context, some investors
have decided to protect their portfolios against subsequent inflation spikes. To do
this, they decided to increase the weighting of commodities in their portfolios.
These changes in the composition of investment portfolios are favored by a context
of strong liquidity (Santander Trade, 2022a).

The liquidity and solvency support measures implemented since March 2020 have
helped mitigate the deterioration of business solvency and, therefore, the risk of
bankruptcy of viable companies. Although the deterioration in solvency is
temporary, the existence of liquidity deficits in the 2020-2021 biennium will
translate into a higher risk of bankruptcy for viable businesses until the economic
recovery allows balance sheets to be rebalanced and business needs to be
reduced. Companies resort to debt financing. In addition, the destruction of the
viable productive structure could trigger a vicious circle through the credit channel
through a potential increase in delinquencies, which could lead to an increase in
the need for bank supply and a reduction in the flow of new credit which in turn
would make it difficult to refinance normal financial maturities (Cos, 2022).
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dos años de COVID-19 Crisis y recuperación de la economía española tras dos
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