Tuesday, July 5

The Bank of Spain lowers the growth forecast to 4.1% in 2022, but sees controlled inflation in 2023

The Bank of Spain has lowered the economic growth forecast another four tenths, to 4.1%, in 2022, but sees controlled inflation in 2023. In updating its economic forecasts, the institution has cut only one tenth the advance of the GDP (Gross Domestic Product) for 2023, up to 2.8%, and reduces the projection of the average CPI (Consumer Price Index) in the current year three tenths, to 7.2%, and leaves it at 2, 6% next.

The Bank of Spain asks to extend the income agreement to pensioners and civil servants to avoid increases according to inflation

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With these forecasts, the Bank of Spain remains confident that Spain will recover pre-pandemic activity in the second half of 2023, in line with the Government, after friction in recent weeks over the institution’s recommendations —especially regarding pensions—and against the most pessimistic scenario of the Organization for Economic Cooperation and Development (OECD), which this week delayed full recovery until 2024, with a vision of much more persistent inflation.

Much of the optimism regarding the OECD is based, on the one hand, on the arrival of foreign tourists and the recovery of spending by these visitors. On the other hand, in investments, favored by the Recovery Plan. Also in the forecast that the bottlenecks in world trade “will be solved in 2023”. And, finally, that private consumption, the most delayed factor in reconstruction after the pandemic, accelerates thanks to accumulated savings and “the dynamism of the labor market”.

The controlled perspective of inflation has to do “with the Iberian solution” for electricity, the cap on gas approved this Thursday in Congress and that is expected to lower the electricity bill by 15%, on average, and that mainly clients of the regulated market will notice. Also in the expectation of a drop in raw materials in international markets.

The Bank of Spain also values ​​that the extension announced by the Government of the Shock Plan for the impact of the war in Ukraine, “without knowing the details yet”, would modify the forecasts. As well as the threat of a total embargo of Russian oil and gas, as recently calculated, and the commercial rupture with Algeria, “which we have not yet estimated”, as admitted by the agency. This accumulation of variables to be incorporated demonstrates the great current uncertainty.

The risks

The risks on the central scenario of the Bank of Spain “are oriented downwards for activity and upwards for inflation”, and have to do with the uncertainty about the developments of the war and its economic repercussions. “A technical recession [dos trimestres consecutivos de caída de la actividad no está en nuestro escenario, aunque no se puede descartar”, incide la institución.

“Una fuente adicional de riesgo de elevada relevancia está asociada al grado de traslación de los aumentos de precios y costes recientes al resto de los precios de la economía y a los salarios. En este sentido, la intensidad con la que, en los últimos meses, parecen estar materializándose algunos efectos indirectos —esto es, la transmisión de los mayores costes de producción a los precios finales— habría elevado la probabilidad de que se desencadenen efectos de segunda vuelta o de realimentación entre precios y salarios significativos, que supondrían una pérdida de competitividad exterior, una mayor inflación y un menor nivel de actividad y empleo para la economía española a lo largo del horizonte de proyección [2024]”, explains the institution.

Lack of information on the Recovery Plan

The rate of execution of the program Next Generation [el Plan de Recuperación] it is also a source of additional uncertainty in the coming quarters. In this sense, the scant information available suggests the possibility of a certain delay in the execution of spending with respect to the calendar considered in the projections”, continues the Bank of Spain.

“Furthermore, the existing uncertainty about the effective deployment of the projects linked to the program Next Generation could lead to delays in some private investment decisions, as suggested by the qualitative information received by the Bank of Spain from its telephone contacts with a group of non-financial companies in our country”, he continues.

This Thursday, the First Vice President and Minister of Economic Affairs, Nadia Calviño, pointed out in the Joint Commission (Congress and Senate) for the European Union that the recognized obligations on the investments of the Recovery Plan barely reach 3,000 million euros, while projects have been authorized for almost 12,000 million.

“On the other hand, in the short term, the combination of higher inflation (which erodes the real income of households and companies) and an increase in interest rates could make it more difficult for agents in a more vulnerable situation to make against the payment of debts (and, as a result, seeing their spending levels limited)”, warns the Bank of Spain.

Only 6% of companies plan to lay off

The survey of Spanish companies on the evolution of their activity in the second quarter concludes that “a large number of companies [un 75%] indicate that the increase in the cost of their intermediate products [los que necesitan para producir u ofrecer los servicios a los que se dedican]fundamentally energy, is the main channel through which its activity is being affected by the Russian invasion of Ukraine”.

A majority of companies [cerca de un 70%] expect cost pressure to remain high over the next year, and almost the same percentage believe they will have to face higher labor costs.

“In the horizon of one year, the percentage of the firms surveyed that expect to raise their sales prices is lower than in the previous quarter, with a decrease of 9 points, to 54%. As a whole, the current and forecast increases in sales prices continue to be lower than those registered in the cost of intermediate consumption, which would continue to point to a compression of business margins [la capacidad de obtener beneficios de las ventas]”, explains the Bank of Spain.

In this survey, some positive readings stand out, such as the fact that only 6% of the companies intend to adjust working hours or make layoffs during the next six months, and only 2% would have planned to request an Erte (temporary employment regulation file).

Meanwhile, almost 30% plan to invest in technology in the same period and 17% would have among their plans to open new markets [aunque este porcentaje es el menor de los últimos trimestres]. It is surprising again that only 13% of the template companies estimate that they will present themselves to a call for the Recovery Plan.


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