Raises the likelihood of significant second-round effects or feedback between significant prices and wages
MADRID, 10 Jun. (EUROPA PRESS) –
The Bank of Spain has cut four tenths its forecast for the growth of the Gross Domestic Product (GDP) of Spain in 2022, from 4.5% to 4.1%, and has lowered its estimates for average inflation of 7, 5% to 7.2%, as a result of the expected effect of the Iberian mechanism to limit the price of gas and lower the electricity bill.
“The start of the war in Ukraine opened up a period of enormous uncertainty, which, three and a half months later, continues unabated”, acknowledged the Director General of Economy and Statistics of the Bank of Spain, Ángel Gavilán, who has warned of that the projections are subject to “significant risks”, oriented downwards in the case of GDP growth and upwards in the case of inflation.
In this sense, and with a view to the coming years, the agency forecasts a growth of 2.8% in 2023, one tenth less than estimated in April, and a rise of 2.6% in 2024, one tenth more compared to the previous forecast.
All in all, the Bank of Spain maintains that the expected evolution of GDP will allow the Spanish economy to recover the level of output prior to the pandemic in the second half of 2023.
The Bank of Spain thus considers that the recovery path of the Spanish economy, if it does not suffer additional disturbances, is “robust” and would allow it to recover pre-pandemic levels in the second part of 2023. “Without giving a false forecast, it may be in the third quarter”, Ángel Gavilán slipped.
The GDP would have grown less than expected, 0.3%, in the first quarter of the year due to the impact of the war, the omicron variant and the carriers’ strike. As a result, GDP was 3.4 percentage points below its pre-pandemic level, a level that had already been reached in the euro area as a whole in the final stretch of 2021.
However, the evolution for the second quarter would have been more positive and the Bank of Spain places growth at 0.4% in the second quarter, since the effects of the conflict are being alleviated with fiscal and regulatory measures.
In the short term, the agency anticipates that the war will continue to have a significant impact on activity. However, in a context in which there are no additional significant disturbances, economic activity would gain more dynamism from the final stretch of this year.
However, somewhat more “stricter” financial conditions are expected, an aspect that could contribute to a certain moderation in the rate of expansion of activity.
Regarding the evolution of employment, the institution has improved the forecast for this year by five tenths, in which it expects an average unemployment rate of 13%, which would drop to 12.8% in 2023 and 12.7% in 2024 .
On its side, the agency improves its estimates of income and expenses for this year, since the public deficit will remain in 2022 at 4.6% of GDP, compared to the 5% previously estimated. In addition, there are also better prospects for 2023 and 2023, with rates of 4.5% and 4.2%, respectively.
Instead, it has worsened its estimates for debt in 2022, after putting it now at 114.9% of GDP, compared to 112.6% previously forecast. Looking ahead to 2023, the debt will stand at 113.2% of GDP, worse than the previous estimate of 112.8%, and in 2024 it will reach 112.5%, better than previous forecasts (113.5% ).
As for inflation, the Bank of Spain has lowered the forecast average for this year from 7.5% to 7.2%. However, the outlook worsens for 2023 and 2024, when rates of 2.6% and 1.8%, respectively, are estimated, higher in both cases.
This year’s fall would be helped by the Iberian mechanism to cap gas, in force as of June 15, which would reduce average inflation by 0.5 points. In any case, the reversal of this measure in 2023, together with the higher expected inflation of the core and food components, explains the upward revision of 0.6 points, to 2.6%, in the general rate.
This mechanism thus suggests a sharp slowdown in the energy component of prices in our country throughout the projection period, so that its year-on-year rate of change, which was 46% in the first quarter of 2022, would become negative at starting in the fall of 2023.
On their side, the estimates for core inflation –excluding food and energy– are worse than the April forecasts. In 2022, the agency expects it to stand at 3.2%, compared to the previous 2.8%, and will fall to 2.2% in 2023 and 2% in 2024.
Although it must be taken into account that on May 30 the INE published the interannual variation of the HICP for May, a rate that would have reached 8.5%. A mechanical update of the effects of this additional inflationary surprise would suggest that in 2022 and 2023 the general inflation rates would be, respectively, one tenth higher and one lower than those forecast before this information became known. Core inflation rates would also be revised upwards, by 0.2 points in 2022 and 0.1 points in 2023, as a result of this “surprise”.
All this has caused companies to carry out a partial transfer to their sales prices of the increases they have been suffering in their production costs and a “relatively vigorous” rebound is taking place in the demand for services that entail a increased social interaction.
The reduction in the inflation rate would also contribute to the extension until September of the measures now in force to counteract the consequences of the rise in energy prices on the income of households and businesses, which would mean a general rate in 2022 some 3 tenths lower than that of the scenario central.
For its part, the average GDP growth rate would be slightly higher in the short term, although this effect would be reversed once the now extended measures are withdrawn. Finally, the public deficit, as a percentage of GDP, would increase between 2 and 3 tenths in 2022.
Regarding the risks in this context of uncertainty, the Bank of Spain warns in its report that the intensity with which, in recent months, some indirect effects seem to be materializing –such as the transmission of higher production costs to prices end– would have raised the probability of triggering significant second-round or feedback effects between prices and wages, which would entail a loss of foreign competitiveness, higher inflation and a lower level of activity and employment for the Spanish economy.
In addition, he has warned that the pace of execution of the NGEU program is also a source of additional uncertainty in the coming quarters. In this sense, the scant information available suggests the possibility of a certain delay in the execution of expenditure.
Lastly, it does not rule out that the process of withdrawing monetary stimuli will give rise to “more abrupt” adjustments in the prices negotiated in the capital markets. In addition, the combination of higher inflation and an increase in interest rates could mean that agents in a more vulnerable situation could experience greater difficulties in meeting their debt payments.
