29.03.2021  The Spanish economy and the COVID-19 crisis: assessment, outlook and challenges Europa Press informative breakfast Pablo Hernández de Cos Governor  *English translation of the original speech in Spanish  Good morning, ladies and gentlemen. I would like to thank the organisers of this event for their kind invitation. I shall begin with a brief assessment of the period since the COVID-19 crisis broke. I shall then set out the Banco de España’s view on the outlook for the Spanish economy. Finally, I shall describe the medium-term economic policy challenges at the national and European level. Taking stock of a year of pandemic: an unprecedented, persistent and uneven impact COVID-19 has caused a global economic recession of an intensity which, in most geographical areas, is unprecedented. The crisis is, moreover, proving very persistent: as of today the pre-pandemic levels of activity have not yet resumed in most countries. Indeed, the successive waves of the pandemic have checked the recovery, particularly in the sectors most exposed to the restrictions. In Spain, this impact is particularly marked. GDP declined by 10.8% in 2020 as a whole, a slump appreciably greater than that in the euro area (-6.8%). At end-2020, Spanish GDP was still 8.9% below its pre-pandemic level, while this gap was 4.9 percentage points (pp) in the euro area. Several reasons account for this more pronounced impact in our country. One was the greater intensity of the pandemic initially, which led to harsher containment measures in spring last year.
The example of Japan in the 1980s suggests that consumer price stability may not be a sufficient condition for precluding bubbles in asset prices and financial instability. With trend inflation averaging two per cent a year, the situation in Japan in the 1980s was very close to what we now commonly mean by price stability. Yet the Japanese economy still moved towards a period of grave financial instability. Thus, the question practitioners have to consider is how to deal with a situation where asset price effects are taken into account with reference to consumer price inflation but where there may still be a risk of asset price bubbles that may lead to financial instability, a destabilisation of the real economy and a severe downward effect on consumer price inflation later on. One could argue that the effects of a large rise in asset prices on aggregate demand may be smaller than the effects of a large fall if such a fall increases general uncertainty and leads to more cautious spending behaviour. If the collapse of a bubble in asset prices has a much stronger effect than the preceding boom, it may be optimal to increase interest rates to raise the probability of bursting a bubble even though such a policy action may temporarily lead to lower consumer price inflation in the short term than otherwise would have been desired.