The weakening of the economy caused by the increase in interest rates by the European Central Bank, the increase in energy prices and the lower growth in exports in this second half of the year has had a profound impact on the latest projections of the Bank of Spain. (BdE). In its Quarterly Report on the Spanish Economy, which it published this Tuesday, the entity points to more persistent and higher inflation rates than it had estimated in June between now and 2025, in a context in which the GDP will draw less throughout the next two exercises.
These new projections have been known just a few hours after this Monday the National Institute of Statistics (INE) revised upwards – for the third time – the growth data of the national economy since 2020 due to the acceleration of consumption and external demand. . . A change in figures that has not been incorporated into the horizon that has now been presented by the regulator.
The organization led by Pablo Hernández de Cos drew a scenario in which the pressure of energy prices will raise the annual CPI rate four tenths more than it had predicted in June, to place it on average at 3.6% this year. In 2024, inflation will tighten even more due to energy and will stand, on average, at 4.3% (seven tenths above the previous calculation published by the BdE). However, not all of the upward revision has to do with energy prices, given that the elimination of the VAT reduction on food and public transport subsidies, which expire at the end of this year, will raise the rate by two tenths. . next year’s inflation rate.
Regarding food prices, whose rise will continue to lose strength in the coming months, the BdE perceives that its moderation is being “quite generalized”, given that more than 70% of the consumption basket is being affected. Furthermore, when comparing the slow deceleration that the inflation of these basic products has been registering since February with other previous episodes that the Spanish economy recorded (for example with August 1977, June 1982 or August 1994, among others), it is not It seems that the current one is so exceptional, even though they understand that it must continue to be monitored. Looking ahead to 2025, the general CPI rate would moderate significantly, to 1.8%, already below the 2% objective that the European Central Bank (ECB) has set for itself in the medium term.
Regarding growth, the regulator maintains its estimate for this year at 2.3%, but reduces the next one by four tenths to 1.8%, largely due to the drag effect that the brake will have on Activity throughout the year. throughout the second semester. The Bank of Spain confirms that the Spanish economy “has also shown signs of weakening in the summer months.” After growing 0.4% in the second quarter, the most recent information available suggests GDP growth of around 0.3% in the current quarter.
The PMIs have deepened the downward path that began in spring, company turnover has weakened between April and June and, despite the fact that Social Security affiliations have shown a “more sustained” behavior in the most recent period, the Employment has clearly increased at a slower rate between May and August. All in all, the entity highlights the fact that the GDP is showing comparatively greater dynamism in Spain than in other countries in the euro area, thanks to the greater weight of services linked to hospitality and tourism, since the country exports less than its partners to China.
Downside risks to growth
The most recent information points to “a relatively weak pulse of activity in the last quarter of the year”, due to the external context remaining weak and the transmission of the rise in interest rates to the costs of new operations. of credit and the financial burden of indebted families and companies. From the beginning of 2024, this activity is expected to regain greater vigor thanks to the fact that the external context will recover, the improvement in real household incomes, and the deployment of the investment projects of the Next Generation funds.
These Tail Winds Could Be Affected, However, by the Progressive Withdrawal of Support Measures to Approve the Energy Crisis and by Moderating the Growth Rate of Tourist Activity, Once Spain Has Recovered Visitor and Travel Levels spending (which has reached even higher levels) prior to the pandemic. Among other risks that the entity manages would be the strength with which China’s reopening continues to occur, the degree of transmission of the political monetary tightening and how both energy prices and food prices behave in international markets. “The risks surrounding these projections are oriented downwards with respect to activity and balanced in relation to inflation,” the entity points out in its report.
