Spanish economy leads growth and controls inflation better than other major EU countries

by Lorraine Williamson
Spanish economy

 

MADRID – The Spanish Bank has improved its forecasts for the Spanish economy. It does, however, lower the growth forecast for 2023 by a tenth, to 1.3%. The organisation is also lowering inflation forecasts for this year and next. 

The Spanish economy is very favourable compared to the scenarios of the central banks in Germany, France and Italy. Of the four major eurozone economies, Spain is the only one that can now boast of escaping recession. El Economista writes this based on data from the central banks. 

ECB outlines a scenario with gloomy undertones 

The national central banks are revealing their forecasts, with which the European Central Bank prepared its forecasts last week. From the headquarters in Frankfurt came a scenario with a gloomy undertone. On one hand, it was predicted that the eurozone is very likely to enter a recession. The good news is that it will be short. However, the bad news is that inflation will remain unchecked. 

Expectations for the Spanish economy 

The Bank of Spain presented its expectations for the Spanish economy on Tuesday. Final GDP growth for 2022 has improved by a tenth to 4.6%. This is “due to stronger than expected progress in the second half of the year.” Except for the Central Bank of Italy, neither the Bundesbank nor the French Bank can say the same before the end of the year. 

Growth rate down next year 

For next year, the Spanish financial institution will reduce the growth rate of the economy by one-tenth to 1.3%. Spanish growth in 2023 will quadruple and triple the forecast for France and Italy respectively. The German economy will shrink by 0.5% next year. 

For 2024 and 2025, the Bank of Spain expects the home country’s economy to grow by 2.7% and 2.1% respectively. Growth rates in Germany, France and Italy are also above the respective forecasts. 

The recession is receding 

Concerning this quarter, which is about to end, the report highlights that “activity would have maintained a certain momentum similar to that of the second quarter of the year”. The figures on employment, consumption, production and confidence point to a growth of 0.1%. Between July and September, the economy grew by 0.2%. 

Fear of sudden drop in activity dispelled 

A few months ago, the central scenario for many economists was that the Spanish economy would fall by several tenths between the last quarter of the year and the first quarter of 2023. But the latest indicators have shown an increase and fears of a sudden drop in the activity taken away. 

If data for the fourth quarter is confirmed, Spain will have avoided recession. Ángel Gavilán, general manager of the Bank of Spain, pointed out that there is a lot of uncertainty in the economic context, but “the forecasts for the current quarter are made with a very broad confidence band.” 

Improvement in both manufacturing and service sectors 

“The improvement has been seen in both the manufacturing and services sectors. PMI data has maintained a positive annual growth rate despite the unfavourable context. In the services sector, the improvement in retail sales is notable, which recorded another positive in October growth rate and is already showing the highest inter-annual fluctuations of the past five months,” said Oriol Aspachs, CaixaBank’s Director of Economics. 

Improved consumer confidence 

Consumer confidence has also improved. Plus, affiliate data continue to show job creation. For the first quarter of 2023, the Bank of Spain indicates that the weakness in economic activity will still be significant. Consequently, the economy will not pick up again until March. 

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Tourism as a force 

Spain has certain advantages in outperforming the rest of the major economies in the short term. On this, Professor of Economics Juan Ramon Rallo says: “I think Spain has a strength that was its weakness in previous years: tourism. In a sense, tourism is not correlated with the evolution of the economy, but if we are in a modest recession tourism will not have to suffer significantly, which will boost the Spanish economy, while other countries with a more industrial and industrial base will suffer much more, especially if there is an energy crisis it.” 

Good labour market performance 

The Banco España report emphasises that the economy is supported by “the good performance of the labour market and by the fiscal stimulus that has started in recent months”. This will support domestic demand. Anti-inflation measures have also helped to absorb the loss of purchasing power. 

Gas ceiling and fuel subsidy 

The gas ceiling has contributed to a reduction in electricity prices and direct support for fuels has brought some relief. The agency also points to the measures to reduce the costs of public transport and the limits on the rent increase. 

In its autumn forecasts, the European Commission already pointed to the relative strength of Spain compared to the major economies of the eurozone. By 2023, the EC expected GDP to increase by 1%, compared to 0.3% for Italy, 0.4% for France and a contraction of -0.6% for Germany. 

The partial decline in high energy prices 

The EC also emphasised that “high energy prices are expected to partially ease from mid-2023, allowing a gradual recovery in activity thanks to the moderate reactivation of private consumption and greater tourism normalisation. 

Moreover, the implementation of the reforms and investments under the Recovery and Resilience Plan is expected to lead to more dynamics in aggregate demand. 

Two downsides 

The Bank of Spain sees two downsides to the impulse it expects for the economy. First, the weakness in consumption, which underpins the modest increase in GDP forecast for the fourth quarter. Second, the excess savings recorded during the pandemic are not turning into spending. On the other hand, foreign trade with net exports would have compensated for the slowdown in domestic demand. 

From temporary to permanent contracts 

The Bank of Spain has calculated that the conversion of fixed-term contracts into open-ended contracts could have contributed to keeping overall expenditures stable in recent months, due to the greater propensity to consume. Historically, converting from a temporary contract to a permanent contract has led to a spending increase of (approximately) 20% in the next two quarters. 

Is inflation going down? 

From the second quarter of next year, economic growth should gradually regain momentum, partly as real incomes improve as a result of the gradual easing of inflationary pressures, the recovery of foreign markets and the investment projects associated with the Next Generation EU program will be deployed”, emphasises the report of the Spanish Bank. Inflation in Spain will decrease from 8.4% in 2022 to 4.9% in 2023, 3.6% in 2024 and 1.8% in 2025. 

The Bank of Spain points to two factors. Firstly, the lower electricity prices compared to other countries, have been achieved through the electricity exemption from the gas ceiling. And secondly also due to the limitation of the gas price itself in the energy costs borne by the industry. 

Also read: Inflation curve reversed in Spain

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