The Bank of Spain has revised its growth forecast for the Spanish economy this year very slightly upwards, by one tenth to 4.6%, due to slightly better behavior than expected in recent months. And it cuts very slightly, by one tenth to 1.3%, that of 2023 due to a worsening in external demand that would be offset by the better data from the end of 2022 and the extension of the Government’s measures against inflation. According to the agency’s projections published this Tuesday, the slowdown in the economy that was already registered in the third quarter will continue during the fourth. If between July and September GDP only advanced 0.2% according to the INE, between October and December it will barely add 0.1% in a context of relatively weak consumption. In the first trimester the atony will continue. And from March a certain rebound will begin to take shape as inflationary pressures ease little by little, foreign markets recover and European funds are deployed. In other words, the supervisor expects that if a new shock does not arise, the Spanish economy will avoid the so-called technical recession in its projections exercise. Especially after the more favorable evolution observed in energy prices. Although due to the high uncertainty, he does not rule out any scenario. “It is rash to do so yet,” said the organization’s director of economy, Ángel Gavilán.
And all of this thanks to the good performance of employment, the significant fiscal boost that the government’s measures against the energy crisis have fostered, and the stability of industrial production, which has benefited from the orders that were pending due to bottlenecks. High-income spending on leisure and hospitality stood out for its strength. And the sales of goods point to a more favorable evolution based on the latest data on registrations and retail trade.
In this way, Spain would avoid the scenario of a decline in activity that the ECB is drawing for the euro area as a whole due to its greater exposure to the energy crisis. Compared to the meager 0.5% predicted by the Eurosystem for the monetary union, production in Spain would hold up much better with an increase of 1.3%. While the euro zone would chain two quarters with slight falls in the fourth of this year and the first of next, the Spanish GDP would dodge the red numbers.
Starting in the second quarter of next year, the Bank of Spain explains that the gradual relief of energy tensions and inflation will play a very important role, which in turn will cause a gradual improvement in real income and confidence. They will help the deployment of European funds and that global supply problems are being fixed. In addition, the extension of the government’s measures due to the war in Ukraine will provide a significant boost to GDP in 2023, up to 0.4 decimals, and will help moderate prices.
Relief in energy prices
The inflation rate would continue on its downward path after having eased by four points in November from the 10.7% year-on-year rate registered in July, mainly due to the drop in energy prices. Taking figures harmonized with Europe, the supervisor expects it to drop from an annual average of 8.4% in 2022 to 4.9% in 2023 and 3.6% in 2024. According to the agency’s calculations, the government’s measures would have contributed to reduce inflation in November by two points due to the discount on fuel, the cap on the rate of last resort for gas and the reduction in VAT on gas. The core, which does not include the most volatile components of the CPI such as energy and food, would have also slowed down, albeit very slightly: from 4.6% in July to 4% in November, largely due to the measures to lower the cost of public transport and the limit on rents.
In fact, inflation in Spain would have been 3.4 points lower than the euro zone average. There had never been such a gap. And this is attributed to the fact that in Spain retail contracts have a faster translation than what happens in wholesale markets. Hence, the CPI was much higher at the beginning and lower now that declines predominate, the document explains. That is, it is not something structural.
Despite this moderation, inflation will remain at high levels for several quarters and core inflation will remain above 2% for a prolonged period. This is because not all cost increases have yet been transferred to prices. This process takes several quarters, the report indicates. And surveys conducted by the bank show that companies expect to continue to do so.
The weakness of consumption and the resistance of employment
The bank stresses that in the second half of this year consumption has suffered from the loss of purchasing power caused by inflation and rate hikes —especially due to variable rates—, uncertainty, lack of confidence —especially among the low income, detects the supervisor— and the loss of some steam in activities such as tourism and the hospitality industry, which had skyrocketed during the spring of 2022 after removing the pandemic restrictions. Investment is not taking off either in the final stretch of the year due to the delay in the execution of European funds, the worsening of financing conditions and the deterioration of prospects.
However, the job market is holding up, with similar enrollment growth in the third and fourth quarters. And that has been accompanied by an increase in permanent contracts. This evolution of employment would be “acting as a support for private consumption, which, even within a marked weakness due to, among other factors, the loss of purchasing power, could have maintained a modest dynamism during the last months of the year,” says the report. Posted this Tuesday. What’s more: although the bank emphasizes that it is not an assessment of the labor reform, the conversion of temporary into indefinite ones could have led to an increase in the spending of these workers by up to 3,000 million euros because the fixed ones usually consume a percentage greater than your income.
Of the twelve percentage points in which permanent contracts have improved, half are for full-time permanent contracts, 25% for part-time and another 25% for discontinuous permanent ones, he points out. Although he also highlights that in recent months the rate of exits from permanent contracts has increased and recalls that in any case the labor market is a lagging indicator of activity.
Corporate turnover also suggests some stability in the fourth quarter. The other support mentioned by the supervisor has been the government’s measures against inflation. In 2023 they will contribute up to 0.4 points to growth. On the contrary, in 2024 they will subtract 0.2 points when they are deleted. And they will cause inflation to drop somewhat less than expected.
All these projections are based on several assumptions: that energy prices maintain a downward path, that the stock of accumulated savings will not pull consumption, and that the measures against the energy crisis will be extended in 2023. Specifically, they would continue with the reduction in electricity taxes, the cap on the increase in the rate of last resort for gas, the limit on the rent review, the freezing of butane, the reduction of the transport pass and the free pass for railway transport. The cap on the price of gas in the production of electricity would be maintained until May. On the other hand, the discount of 20 cents on fuel would be abolished on January 1. If this bonus continues until the end of 2023, inflation would decrease next year by up to seven tenths.
Although the government’s measures will boost GDP and lower inflation, it will be at the cost of more public deficit. What’s more, according to the supervisor’s estimates, the hole in public accounts will decrease this year thanks to the good performance of collection from 6.9% of GDP to 4.2%. And next year it will practically not drop due to the measures. The Bank of Spain insists that only a quarter of these are focused on the most vulnerable groups and that these should be more surgical given the limited margin of public accounts.
These estimates are also based on the fact that neither significant salary increases nor that business margins are skyrocketing are being detected. According to the supervisor’s forecasts, the pre-pandemic level of activity will not recover until the end of 2023 or the beginning of 2024. Currently, there are still two points to go, while in the euro zone they are already two points above the previous levels. to the covid The unemployment rate will fall very slightly, but it will not fall below 12% throughout the projection horizon until 2025.
In any case, the supervisory body recalls that all these projections are subject to many uncertainties: the evolution of the war and prices; the probability that the euro zone and the United States will enter a recession; the imbalances in the Chinese economy, or how the markets, companies and families will react to the tightening of financial conditions.
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