MADRID – The Governor of the Banco de España, Pablo Hernández de Cos, on Monday warned of a “significant downward revision” to the Spanish economy growth forecast for this year and next.
The Spanish National Bank will not publish new macroeconomic forecasts until December. However, other panels are already downgrading theirs. Hernández de Cos referred to Consensus Forecast, which in mid-October lowered its growth forecast for Spain in 2021 by 0.5%.
Lower GDP growth
The latest Banco de España macroeconomic forecasts, published in late September, still estimated GDP growth at 6.3% for the current year and 5.9% for 2022. Shortly afterwards, the Spanish statistical institute INE already announced a significant correction of the growth estimate for the second quarter. Growth was revised from 2.8% to 1.1%.
Such a large correction ‘automatically implies a significant reduction in the average GDP growth rate for 2021. And, to a lesser extent, also for 2022′, according to Hernández de Cos. This reinforces our feeling that the projections are outdated,’ he concluded.
Draft budget unchanged
Despite the announcement of the INE, the Spanish government has chosen not to change the macroeconomic picture in its draft budget law. Before the announcement of the cut, it predicted Spanish GDP would increase by 6.5% in 2021 and 7% in 2022. The government’s estimate was endorsed by the independent fiscal authority AIReF.
The Spanish Economy Minister, Nadia Calviño, then based the decision not to change her calculations on the context of ‘volatility’ caused by the pandemic, stating that ‘just as we do not adjust our figures upwards when there is positive news, it is also not appropriate to adjust them when there are other types of adjustments’. The growth forecast included in the draft budget determines the spending limit that the government can set in the public accounts.
The global economic environment is deteriorating
The downward revision of the Banco de España’s macroeconomic forecasts is influenced by “some changes in the global economic environment”. This has become more relevant in recent weeks, Hernández de Cos said. Among other things, the governor cited the changes in supply chains and the rise in the prices of certain commodities. This specifically includes energy. And these are factors that ‘seem to indicate a deterioration in the global economic environment’. This is something that many households and businesses are already feeling in their real incomes. And, which in turn ‘has a negative impact on the pace of recovery’.
The Governor said: ‘High inflation is transitory, but it will last longer than expected’. He also warned a higher rise in inflation in the final months of this year could increase pension spending by another €3.5 billion. Furthermore, he called for a pension system reform that takes into account ‘the distribution of costs and benefits between generations’.
Hernández de Cos praised the 2012 labour reform that created jobs even in difficult times. The withdrawal of the reform by the coalition government has caused considerable friction. The governor pointed out the reform does not solve long-standing problems such as the many temporary contracts or long-term unemployment. ‘We cannot continue to have the same problem of temporary contracts – a problem we have had for decades. Not without making reforms, even if some of them may be a little daring,’ he said.
Deterioration of public finances
The governor concluded that the pandemic crisis has led to ‘a serious deterioration’ of public finances ‘which in turn has resulted in a very high structural deficit and public debt’. And although he warns of the risk of premature withdrawal of the stimulus measures, he considers it ‘indispensable’ to implement ‘a medium-term fiscal adjustment plan’. If no fiscal consolidation effort is made, Hernández de Cos said, the Banco de España expects public debt to remain at around 115% of GDP for the next 15 years.