The unexpected turnaround in the energy markets, together with the easing of bottlenecks in the arrival of supplies, had begun to dissipate some of the main uncertainties weighing on the Spanish economy. But that was without counting the repercussions of the episode of financial instability that has been unleashed since the fall of Silicon Valley Bank, and that continues to spread.
For the moment, the expansionary forces are the ones that dominate the situation, as shown by the good performance of the labor market and activity surveys, with PMI indicators pointing to growth both in services and -and this is the new thing- in industry . Tourism gives good feelings, and it would be a hair’s breadth from exceeding pre-pandemic levels in terms of foreign entries. All of this is compatible with an increase in GDP in the first quarter and probably also in the second, based on the surge announced for this Holy Week.
Beyond that, the effects of the monetary adjustment and the financial tensions that have surfaced in recent days will gain prominence. The contraction of bank credit, an important advanced indicator of activity, is already palpable: the volume of new loans to households has fallen by 8% since last summer and in the case of companies the decrease reaches 9.3% (with data seasonally adjusted and smoothed up to January). Similarly, financial institutions also declare that they have tightened the conditions for access to credit, according to the latest ECB survey carried out before the collapse of SVB.
The credit restriction can only worsen after the ECB’s latest turn of the screw, and above all as a consequence of the probable prudent reaction of financial institutions in an environment marked by a loss of confidence. Financial institutions face latent losses that are generated almost automatically as the bonds they had bought at fixed interest rates during the era of monetary abundance are devalued. Although these are potential losses (they are only made in the event of the sale of the securities before reaching maturity), the entities cannot afford to add to this risk of interest rates another risk of default on the credits they grant, hence the need for greater caution in the policy of lending to the private sector.
In general, monetary policy decisions could have a more pronounced impact in the second part of the year, taking into account the latency time between the measures and the evolution of the economy. Furthermore, as was the case in the 2008 financial crisis, the impact is reinforced with each additional increase in interest rates (ie the impact is not linear).
In any case, the key is inflation. If it moderates significantly, the central banks will have the opportunity to stop their rate hikes, mitigating the risks of recession and financial crisis. The next CPI data is expected to ease the pressure: in the case of Spain, the increase will be less than 5% in year-on-year terms, compared to the months immediately following the invasion of Ukraine (step effect). In addition, electricity has become 16% cheaper so far this month. But Frankfurt has already detected second-round effects on the margins of some sectors, and warns of the possibility of a wage reaction in member countries with more stressed labor markets. Labor costs increased by almost 6% in the fourth quarter in average year-on-year terms in the euro area, but only 3.6% in Spain. A heterogeneity that further complicates the task of monetary policy in its increasingly contradictory double objective of acting vigorously against inflation and at the same time ensuring financial stability.
The inflation rate of the Industrial Price Index stood at 7.8% in February, well below the rates registered throughout 2022, which came to exceed 40%. This moderation is mainly due to the drop in the energy index experienced since last summer (despite which it continues above 2021 levels). The food industry index continues to offer worrying signs: its interannual rate has barely dropped a few tenths to 20%, which suggests that the shopping basket will continue to become more expensive.
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