The Spanish economy is in its last quarter of expansion before inflation manages to dampen consumption and growth, with a forecast of flat GDP growth in the fall. Economists from the Foundation of Savings Banks (Funcas) warned this Monday of a “sharp economic slowdown” for the coming year and which will begin to be noticed and manifest after the summer . Geopolitical tensions due to the conflict in Ukraine, the energy crisis and the scarcity of raw materials, as well as the change in direction of monetary policy to deal with already structural inflation, are clouding the prospects for economic growth in our country.
In this context, Funcas expects Spanish GDP growth of 4.2% this year and a sharp slowdown to 2% in 2023. Concretely, the economists of Funcas maintain their forecasts for this year; but they cut their previous forecast for the year 2023 by 1.3%.
As Carlos Ocaña, General Manager of Funcas, and Raymond Torres, Situation Manager of Funcas, pointed out today Monday, these figures are subject to a scenario marked by great uncertainty and conditioned by factors such as the duration of the war in Ukraine or the evolution of energy prices. Despite this context of high volatility, the Spanish economy will grow above the European average throughout the forecast period.
As for inflation, the consumption deflator will increase by 8.8% this year and will remain high next year, at a level of 5%, against a background of rising energy prices until next spring. These rates represent increases of 2.8 and two points from the last forecast. It should be noted that these forecasts already include some of the measures from the Government’s latest shock plan. The growth gap between domestic and foreign prices will make the import price shock “the biggest our country has seen since the 1970s,” Torres warned.
According to the updated economic forecast for Spain 2022-2023, the dynamism of the labor market will continue, although at a slower pace, in line with the sharp slowdown in the economy. Until the end of 2023, almost 600,000 jobs will be created, with which the unemployment rate will drop to 12% at the end of this year.
The decline in household purchasing power is already weighing on growth. The domestic demand will only contribute around 2.1 points for the current year, ie 1.7 points less than in the March forecast. “This decline mainly reflects the loss of purchasing power of consumers due to inflation,” they explain from Funcas. Despite this, households will use the savings accumulated during the pandemic to finance their expenditure, which will allow a slight growth in private consumption.
Thus, economists predict “relatively strong” quarterly GDP growth rates for the second and third quarters, of 0.5% and 0.7% respectively. Funcas explains this situation by the rebound in tourism, exports of non-tourist goods and services and the “pull” of employment, which generated 263,000 net affiliates to Social Security in the first half alone.
Although Spain will have a good summer, for the fourth quarter we expect a “sharp slowdown” with stable growth at 0%, in which the so-called recessive factors should gain weight. Funcas’ director of international situation and analysis, Raymond Torres, pointed to the energy costs and supply cuts that mostly affect the industry more than the service sector.
For its part, the contribution of the external sector was revised upwards, to 2.1 points, i.e. 1.7 points more than in March, as a result of the recovery of tourism revenues to pre-pandemic levels and , to a lesser extent to some extent, sales of non-tourism goods and services abroad.
Ultimately, the public deficit will decrease this year, but in 2023 there will be little improvement to contain the imbalances due to the cooling of the economy, the revaluation of the salaries of civil servants and the attachment of certain budget items such as pensions. “The hole will be around 4.5% of GDP in 2023, a value close to its structural level, and the debt will be 112%”, warns Funcas.
Faced with this situation of galloping inflation, Ocaña insisted that a reasonable income policy is necessary, which does not deteriorate the competitiveness of the economy. “And it requires prudent fiscal policy that does not amplify the inevitable increase in the cost of our high public debt,” he added.
Regarding the taxes on energy and banks recently announced by the President of the Government, Pedro Sánchez, the director of Funcas considered that these types of measures, “à la ‘Robin Hood'” have the disadvantage of generating less than the expenses they impose on economic agents. “You have to be very careful,” Ocaña recalled.