The Bank of Spain rules out that GDP recovers pre-covid levels before 2024


The Bank of Spain rules out that the national economy will recover pre-covid growth levels before the first quarter of 2024, due to the impact of higher and more persistent inflation than expected in the midst of a very complex international scenario, aggravated for the war in Ukraine. This year, the GDP will close around 2.3 percentage points below the level prior to the outbreak of the pandemic and, Going forward, the recovery will be “less intense than previously projected”, due to the sharp rise in prices. In fact, the upward revision of inflation in 2023, both in Spain and in the euro area, is also beginning to be due to the rise in prices being registered by other items in the consumer basket other than energy and food.

The tightening of financing conditions, with the rate hike initiated by the European Central Bank in July to tackle high inflation, and the deterioration of the external environment also contribute to reducing growth expectations. The fact that the external context has worsened notably also “It undermines the expectations of Spanish exports”, despite the gain in competitiveness implied by the depreciation of the euro against the dollar (most of our exports are to EU countries). On the positive side, both the resistance of tourism, as well as the funds linked to the Next Generation program or the gradual solution of the breaks in the global supply chains may represent an additional stimulus for activity.

The prospects for the Spanish economy in the central scenario are subject to extraordinary uncertainty, and the risks are oriented to the downside. “In our central scenario, no recession is expected, but it is true that the probability is greater,” says Ángel Estrada, general director of Financial Stability, Regulation and Resolution of the BdE. This scenario contemplates a moderation of inflation towards a level close to 2% in 2024. However, if the war in Ukraine intensifies, there could be greater distortions in Europe’s energy supply and inflation more pronounced and more persistent than anticipated. . This would affect the purchasing power and confidence of families and companiesand would again have a negative impact on their spending decisions and on employment and activity.

The persistence of high inflation rates, the tightening of financial conditions, the maintenance of certain distortions or bottlenecks on the supply side, the reduction in agents’ confidence, and the existence of a high degree of uncertainty, contributed to a weakening of activity in the third quarter of this year. Predictably, these factors will continue to put downward pressure on the prospects for Spanish economic activity in the coming quarters.

Greater uncertainty about the evolution of supply factors also constitutes a risk. Potential disruptions to transportation and the supply of raw materials and energy goods, as well as the maintenance of sanitary restrictions in Asia-Pacific, can aggravate bottlenecks in global value chains. In addition, if there were to be a drastic reduction in the gas supply to Europe from Russia, the industrial activity of the most directly dependent EU member countries could be greatly affected, which would be transmitted through trade to the rest of the countries in the area. .

More vulnerable due to public debt

The deficit of the Public Administrations (AAPP) in Spain has been reduced in the months elapsed in 2022 to 4.6% of GDP in June 2022, which represents 2.3 percentage points less with respect to the value observed at the end of 2021. This reduction has been faster than anticipated in previous macroeconomic forecasts. In terms of the ratio of public debt to GDP, it is expected that this will remain stable in 2022 with respect to the value observed at the end of 2021 (118.4% of GDP) and that the expansion of nominal GDP will allow a certain reduction until 2024 (109.9% of GDP). Nevertheless, the high existing public indebtedness supposes a vulnerability of the Spanish economyparticularly in a context in which the monetary policy normalization process has raised the financial cost of public debt.

The amortization of debt that was issued at comparatively high interest rates during the global financial crisis and the maintenance of relatively long maturities in Spanish sovereign debt continue to contribute to this containment of the average cost of debt. However, these beneficial effects are expected to gradually weaken if the current period of tighter monetary conditions is extended.

Overall, the expectations for the evolution of public debt in Spain continue to place it at high levels in the coming years. In this way, it would remain a vulnerability to the potential deterioration of financing conditions, with limited fiscal space to react to the materialization of new risks. In the current context of high inflation and public indebtedness, fiscal policy measures must be targeted and focus on the lowest income households, which are the ones that suffer the most from the impact of inflation, and on the companies that are most vulnerable to this disturbance. In addition, the measures must be temporary in order to avoid a further increase in the structural public deficit.

Fiscal consolidation and European funds

In parallel, it is necessary to initiate a process of fiscal consolidation that allows the gradual reduction of current fiscal imbalances and gain room for maneuver to be able to react to future disturbances. In this regard, it must be borne in mind that the deployment of investment projects associated with the Next Generation EU (NGEU) European program already represents —even though the execution of said program is experiencing some delays— an appreciable fiscal boost. Therefore, the combination of an intensive use of European funds —which does not have direct effects on the public deficit, but does have positive effects on economic activity— with the start of the fiscal consolidation process would make it possible to maintain a certain support for economic activity —which may be necessary in a context in which the GDP levels prior to the pandemic have not yet been reached— while a gradual reduction of the high structural public deficit that public finances currently present in Spain begins.

The high inflation and the increase in interest rates would already be increasing the degree of financial pressure borne by households, especially among those with lower incomes. In particular, the increase in energy prices would be giving rise to a reduction in savings among households with greater financial resources, and forcing a reduction in the consumption of non-energy goods among those with lower income. The pass-through of the rise in market interest rates to the cost of bank financing for households has still been moderate. However, a greater increase in the cost of loans is expected in the coming quarters, in particular, as mortgage rate revisions incorporate increases in the Euribor, which would increase the financial pressure on households.


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