Monday, June 5, 2023

Bank of Spain does not expect a technical recession in Spain’s economy and inflation finds some respite

Bank of Spain Governor Pablo Hernandez de Cos.JJ Guillen (EFE)

The Bank of Spain has revised its growth forecast for the Spanish economy slightly upwards this year, up one tenth to 4.6%, due to slightly better-than-expected behavior in recent months. And it projects a much smaller cut by one-tenth to 1.3% in 2023, due to a slump in external demand that will be offset by better data from late 2022 and an extension of the government’s measures against inflation. According to the agency’s estimates published this Tuesday, the slowdown in the economy that was already recorded in the third quarter will continue during the fourth. If between July and September GDP advanced only 0.2% according to INE, it would add barely 0.1% between October and December in the context of relatively weak consumption. In the first quarter of next year, they expect a modest growth of 0.1%. And from March onwards a definite rebound will start taking shape as inflationary pressures gradually ease, overseas markets recover and European funds get deployed. In other words, the observer expects the Spanish economy to avoid a so-called technical recession in its forecast exercise if no new shocks occur. Especially after a more favorable development in energy prices. However due to the high uncertainty, it does not rule out either scenario.

And all this thanks to a good employment performance, a significant fiscal stimulus from the government’s measures against the energy crisis, and the stability of industrial production, which benefited from pending orders due to constraints. Higher income expenditure on leisure and hospitality stood out as one of its strengths. And based on the latest data on merchandise sales registrations and retail trade point to a more favorable development.

In this way, Spain will avoid the scenario of a decline in activity, which the ECB is attracting for the entire euro area due to its greater risk of an energy crisis. Production in Spain will fare much better, with a 1.3% increase, compared to the 0.5% projected by the Eurosystem for monetary union. While the euro zone will post a series of two quarters with modest declines in the fourth of this year and the first of next year, Spanish GDP will dodge red numbers.

Starting in the second quarter of next year, the Bank of Spain pointed out that the gradual relief of energy stress and inflation will play a very important role, which in turn will lead to a gradual recovery in real income and confidence. They will help with the deployment of European funds and global supply problems are being fixed. In addition, an extension of government measures due to the war in Ukraine would provide a significant boost to GDP by 0.4 decimal points in 2023, and help moderate prices.

energy price relief

Inflation will continue its downward trend after a four-digit reduction in November from the 10.7% year-on-year rate registered in July, mainly due to a fall in energy prices. Taking figures in line with Europe, the observer expects it to fall 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 may have contributed to easing inflation in November. Two points because of the rebate on fuel, the cap on the rate of last resort for gas and the reduction in VAT on gas. The core, which excludes the most volatile components of the CPI such as energy and food, would also have slowed, though much less: from 4.6% in July to 4% in November, largely due to cost-cutting measures. Due to limits on public transport and fares.

In fact, inflation in Spain would have been 3.4 points lower than the euro area average. There was never such a gap. And this is attributed to the fact that retail contracts translate faster in Spain than in wholesale markets. Therefore, the CPI was initially very high and has now come down, which is predetermined, the document states. That is, it is not something structural.

Despite this moderation, inflation will remain elevated for several quarters and core inflation will remain above 2% for a prolonged period. This is because not all of the cost increase has yet been transferred to prices. This process takes several quarters, the report indicates. And surveys conducted by the bank show that companies expect them to continue to do so.

Weakness of consumption and resistance to employment

The Bank emphasizes that in the second half of this year, consumption has been hit by loss of purchasing power due to inflation and rate hikes – especially due to variable rates – uncertainty, lack of confidence – especially low Between earnings, the observer finds – and the loss of some steam in activities such as the tourism and hospitality industry, which were slated to skyrocket through the spring of 2022 after pandemic restrictions were lifted. Delay in execution of European funds, worsening of financing conditions and worsening of prospects are holding back investments even in the last phase of the year.

However, the job market is on hold, with similar enrollment growth in the third and fourth quarters. And with it has come an increase in permanent contracts. This growth of employment “would act as a support for private consumption, which, despite a marked weakness due to loss of purchasing power, among other factors, could maintain a modest dynamism during the final months of the year”. ,” says the report. Posted on this Tuesday. What’s more: Although the bank emphasizes that this is not an assessment of labor reform, changing temporary to indefinite could increase the expenses of these workers by up to 3,000 million euros as stable people usually consume a Huh. percentage above your income.

Of the twelve percentage points that have improved permanent contracts, half are for full-time permanent contracts, 25% for part-time and another 25% for ongoing permanent contracts, he explains. However it also highlights that the rate of exit from permanent contracts has increased in recent months and is a reminder that labor is in any case a lagging indicator of market activity.

Corporate turnover also suggests some stability in the fourth quarter. The other support mentioned by the observer is the government’s measures against inflation. In 2023, they will contribute up to 0.4 points to growth. In contrast, they would subtract 0.2 points if removed in 2024. And they will cause inflation to drop somewhat less than expected.

All these projections are based on a number of assumptions: that energy prices remain on a downward trend, that accumulated savings will not pull consumption, and that measures against the energy crisis will be extended in 2023. In particular, they will continue the reduction in electricity taxes, the cap on rate increases of last resort for gas, limits on fare reviews, freezing of butane, reduction in transport passes and free passes for railways. transportation. The cap on the cost of gas in the generation of electricity will be maintained until May. At the same time, from January 1, the discount of 20 cents on fuel will be abolished. If this bonus continues until the end of 2023, inflation will be reduced by seven tenths the following year.

Although the government’s measures will boost GDP and reduce inflation, it will be at the cost of a higher public deficit. What’s more, the hole in the public accounts will shrink this year thanks to a good collection performance from 6.9% of GDP to 4.2%, according to observer estimates. And next year it will practically not fall due to the measures taken. The Bank of Spain insists that only a quarter of these are focused on the most vulnerable groups and should be more surgical given the limited margin on public accounts.

These projections are also based on the fact that neither significant wage growth is happening nor business margins are skyrocketing. According to the observer forecast, activity will not recover to pre-pandemic levels until late 2023 or early 2024. Currently, there are still two points to go, while in the euro area they are already two points above the previous level. The unemployment rate will fall very slightly, but it will not fall below 12% during the projection horizon until 2025.

In any case, the supervisory body recalls that all these estimates are subject to a number of uncertainties: the development of the war and prices; There is a possibility that the euro area and the United States will enter recession; Rebalancing in the Chinese economy, or how markets, companies and households will respond to a tightening of financial conditions.

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