Brussels is cutting growth for Spain in 2023, from the 3.4% announced in May to 2.1% now, and expects inflation to continue to skyrocket in 2022, at 8.1%, above the average for the euro zone (7.6%). This follows from the summer forecasts published this Thursday. The European Commission forecasts that “the gap with the pre-pandemic level of GDP will close in the second half of 2023, when quarterly growth rates are expected to regain dynamism.” Two months ago he predicted that recovery for the third quarter of next year.
Brussels lowered growth to 4% for Spain in 2022 in the spring
In May, the Government already lowered growth forecasts for 2022 from 7% to 4.3%. The International Monetary Fund did the same, from 5.8% to 4.8%. And the European Commission then passed them from 5.6% forecast on February 10, to 4% of GDP announced in spring due to the impact of the war unleashed in Ukraine after the Russian invasion of the country.
Brussels then also cut its forecasts for 2023 for Spain by one point, and went from 4.4% to 3.4%, which led to a delay in reaching pre-pandemic levels until the third quarter of 2023.
But this Thursday the scissors of the forecasts are even greater, especially in what has to do with 2023. Thus, the European Commission foresees that Spain will grow 2.1% next year, instead of the 3.4% that it predicted just two months ago.
Sources from the Ministry of Economic Affairs explain, in relation to the forecasts of the European Commission: “It forecasts that Spain will grow above the average of the euro zone and the European Union both in 2022 and in 2023; that it will grow above France, Germany, Italy and the Netherlands in both 2022 and 2023; Despite the current uncertainties and the lowering of the growth forecast for the EU as a whole, Spain would maintain a growth rate of 4% in 2022 and 2% in 2023, the highest among the large economies of the European Union”.
According to the Government, “the forecasts of the European Commission show that inflation is a European and global phenomenon. In fact, the inflation forecast in Spain is below that of the European Union both in 2022 and 2023. The Commission agrees with the forecasts of the rest of the institutions in considering that inflation will moderate very significantly in 2023”.
In addition, while the European Commission forecast in May GDP growth both in the EU-27 and in the euro area of 2.7% in 2022 and 2.3% in 2023, compared to 4% and 2.8 % (2.7% in the euro area), respectively, in the forecast for last February, in July it cut expectations. Thus, it predicts a growth of 2.6% in 2022 and 1.4% in 2023 in the euro zone.
“Russia’s war against Ukraine continues to negatively affect the EU economy, putting it on a path of lower growth and higher inflation compared to the spring forecasts,” says Brussels: “The (provisional) economic forecasts for summer 2022 The EU economy is projected to grow by 2.7% in 2022 and 1.5% in 2023. Euro area growth is forecast at 2.6% in 2022, moderating to 1.4% in 2023. Average annual inflation is projected to reach record highs in 2022, at 7.6% in the euro area and 8.3% in the EU, before falling in 2023 to 4% and 4.6 %, respectively”.
Thursday’s data worsens that of May, in which Brussels expected inflation to begin to decline slowly in the middle of the year, helped by government measures such as fuel discounts and the cap on wholesale gas prices. Two months ago, it forecast year-on-year inflation to rise in Spain from 3% in 2021 to 6.3% in 2022. In 2023, it expected the reversal of base effects of energy prices to bring measured year-on-year inflation down to 1, 8%.
Now, in July, the forecast worsens: 8.1% for 2022 (above the average for the euro zone) and 3.4% for 2023 (below the average).
“Many of the downside risks surrounding the 2022 spring forecast have materialized,” Brussels says: “The Russian invasion of Ukraine has put additional upward pressures on energy and food commodity prices, which are fueling inflationary pressures. global markets, eroding the purchasing power of households and provoking a faster monetary response than previously assumed.
“The ongoing slowdown in growth in the US adds to the negative economic impact of China’s strict zero COVID policy,” argues the European Commission: “The EU economy remains particularly vulnerable to developments in energy markets due to its heavy reliance on Russian fossil fuels, and weakening global growth detracts from external demand. The momentum gained from last year’s rebound and a somewhat stronger first quarter than previously estimated are expected to underpin the annual growth rate to 2022.”
The European Executive adds: “Even so, economic activity in the rest of the year is expected to be moderate, despite promising summer tourism. In 2023, quarterly economic growth is expected to gain momentum thanks to a resilient labor market, moderating inflation, support from the Recovery and Resilience Fund, and still-large savings. Overall, the EU economy is expected to continue to expand, but at a significantly slower pace than expected in the spring 2022 forecast.
“Inflation through June has reached record highs as energy and food prices continued to rise and price pressures spread to services and other goods,” says Brussels: “In the eurozone, inflation grew with strength in the second quarter of 2022, from 7.4% in March (year-on-year) to a new all-time high of 8.6% in June. In the EU27, the increase was even more pronounced, with inflation jumping a full percentage point, from 7.8% in March to 8.8% in May.
According to the European Commission, “the inflation forecast has been revised upwards considerably compared to the spring forecast. In addition to the sharp increase in prices in the second quarter, a further increase in gas prices in Europe is expected to be passed on to consumers through electricity prices. Inflation is forecast to peak at 8.4% year-on-year in the third quarter of 2022 in the euro area, and thereafter decline to below 3% in the last quarter of 2023, both in the euro area and the EU, as supply pressures, constraints and commodity prices fade.
According to the forecasts of the Community Executive, “the risks for the forecast of economic activity and inflation depend to a large extent on the evolution of the war and, in particular, on its implications for the supply of gas to Europe. Further increases in gasoline prices could further boost inflation and stifle growth. Second-round effects could, in turn, amplify inflation and lead to further tightening of financial conditions that would not only weigh on growth, but also carry higher risks to financial stability. The possibility that the resurgence of the pandemic in the EU will bring new disturbances to the economy cannot be excluded.”
“At the same time,” Brussels says, “recent downward trends in oil and other commodity prices could intensify, causing inflation to fall faster than currently expected. In addition, thanks to a strong labor market, private consumption could prove more resistant to price increases if households used more of their accumulated savings.
“Real GDP growth slowed sharply in 2022-Q1 (0.2% qoq) due to supply disruptions and rising inflationary pressures”, says Brussels on Spain: “Private consumption contracted significantly and was expected to remain under pressure over projection horizon [2022-2023], in a context of high inflation and weak consumer confidence. However, quarter-on-quarter GDP growth rates are expected to slightly accelerate in the next two quarters due to the return of tourism to pre-pandemic levels. Towards the end of the year, economic activity is projected to slow again despite a faster implementation of investments under the recovery and resilience fund, as households are expected to adjust their consumption decisions to higher prices and economic uncertainty.
The European Commission states that “GDP growth is forecast at 4% in 2022 and 2.1% in 2023. The gap with the pre-pandemic level of GDP is expected to close in the second half of 2023, when quarterly growth rates are expected to regain dynamism”.
Compared to the spring forecast, “the changes in the outlook for 2023 are mainly explained by a more pronounced impact of inflation on the purchasing power of households, particularly at the beginning of the year, in a context of limited salary increases. The impact on private consumption will be partially cushioned by the release of accumulated savings, the resilience of the labor market and the indexation of pensions. In 2023, investment, under the impetus of the Recovery and Resilience Plan, is expected to be the main driver of demand.”
The Community Executive expects year-on-year inflation to reach 8.1% in 2022 and 3.4% in 2023.
“Energy prices have been fueling inflationary pressures since the second quarter of 2021,” says Brussels, “and the pass-through effect to other goods (particularly food) and services (particularly the hospitality sector) has been accelerated in recent months. Compared to the spring forecast, the persistence and intensity of this effect is the main reason behind the revised inflation outlook. Power prices are expected to moderate slowly from the second half of 2022, helped by government measures that came into force in June, including a gas price cap aimed at reducing wholesale electricity prices and an additional VAT reduction on the electricity bill (from 10% to 5%). Core inflation is expected to remain high during 2022 and start to decline in the second quarter of 2023.