Spain’s GDP Shrinks 18.5% in Europe’s Worst Contraction Yet

(Bloomberg) -- Spain's economy suffered a bigger blow than expected in the second quarter, leaving it with a long recovery that's become even tougher after a new hit to its vital tourism industry.

The record 18.5% drop in output -- led by plunges in consumer spending and investment -- is the deepest reported so far in Europe, where restrictions to control the coronavirus battered businesses and households. Economists had anticipated a 16.6% contraction.

The virus fallout has been widespread across the continent, with data on Friday showing France and Italy contracting 14% and 12% respectively. Figures later in the day are expected to reveal a double-digit slump in the euro area.

Spain's figures put the spotlight on southern European countries that suffered the most from the pandemic after entering the crisis with already-strained public finances. Europe's fourth-largest economy had one of the continent's earliest and deadliest outbreaks of the coronavirus, along with Italy, and the government responded with a strict lockdown.

Both countries are heavily reliant on tourism, a sector that's been slammed by the pandemic. In Spain, a bad summer season took a turn for the worse when the U.K. announced last weekend that holidaymakers returning from there would have to quarantine because of an uptick in coronavirus cases in regions such as Catalonia.

What Bloomberg Economists' Say...

“The shock was deeper than in Germany and France, reflecting the impact of stricter measures and an economy more reliant on the hospitality sector. We also anticipate Spain's recovery in 3Q will be shallower, dragged down by tourism and heightened risks of a second outbreak.”

-- Maeva Cousin, euro-area economist. Read her full REACT.

Nearly every industry in Spain contracted in the second quarter, with the exception of government spending, agriculture and financial and insurance activities, which grew slightly. The hardest-hit sectors were retail, transport, restaurants and bars, which together plunged 40.4%.

The Spanish economy has been particularly affected by the crisis because of the relatively small size of its companies, which leaves them more vulnerable and less capable of effectively responding to the shock. Business associations expect tens of thousands of small and medium-sized companies to go bankrupt before the end of the year.

While Italy fared better than economists had expected, its fragile economy was already heading for recession before becoming Europe's first epicenter of the pandemic. Forced to spend billions of euros on health and economic aid, it's become even more reliant on massive bond purchases by the European Central Bank to keep financing costs in check.

Italian Finance Minister Roberto Gualtieri said activity has been recovering in June and July. But the economy will still probably shrink about 9.5% this year and grow only 4.8% next year, according to the Bank of Italy's latest estimates.

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