The Bank of Spain cut GDP growth this year to 4.5% and does not rule out a possible recession | Economy

The invasion of Ukraine by the Russian army is constituting such a severe economic disturbance that it is conditioning the different macroeconomic scenarios worldwide and consequently also that of the Spanish economy.

The word uncertainty is the most used when making forecast scenarios for the economy. And it is that everything will depend on the duration of the Ukrainian conflict. However, no one is unaware that if the conflict continues for a good part of this year, the current forecasts would be diluted again and it would be necessary to correct them and consequently worsen them.

Such is the degree of concern, that the Bank of Spain itself does not rule out that the Spanish economy could enter a recession depending on the evolution of the war, which would cause even temporary declines in activity to be seen in some quarters.

Apart from this consideration and under the current conditions, the truth is that the armed conflict is translating into a generalized negative impact that is reducing the levels of economic activity, while the dynamics of prices are tightening upwards.

Against this background, the Bank of Spain presented the new projections for the Spanish economy by the hand of its new General Director of Economy and Statistics, Ángel Gavilán, integrated into its Quarterly Report on the Spanish Economy.

Their projections contemplate an average GDP growth rate of 4.5% this year, which is 9 tenths less than the projections presented last December. The Bank of Spain, in fact, warns that this reduction would be even more pronounced if it were not for the fact that, since the publication of the December projections, the data that has been known about the evolution of the second half of 2021 has been more favorable than expected, which has a positive mechanical impact of 8 tenths on the GDP growth rate for 2022, a statement that must be quarantined, since the worst omens are expected precisely for the second half of this year.

In the following two years, the new projections anticipate that the activity will maintain a contained dynamism. The GDP would grow by 2.9% and 2.5% in 2023 and 2024, respectively, worsening the 2023 estimate by one point, but improving the 2024 estimate by 7 tenths.

Under this scenario, the recovery of the pre-pandemic level of activity would take place in the third quarter of 2023 and all this as long as there are no distortions greater than those currently estimated.

With regard to price developments, the inflation rate will stand at 7.5%, on average, in 2022. Energy futures markets expect some easing of prices from July this year, which will contribute to their moderation. However, he considers that prices will continue to be under pressure, so the CPI rates will be around 10% until the summer. To remember that the data advanced by the INE placed the CPI for March at 9.8% year-on-year

The Bank of Spain considers a crucial assumption underlying the projections, which is the reduced magnitude of the second-round effects, hence the numerous messages sent from the institution to reach an income pact and not index the economy to inflation, in line with the latest recommendations of its governor, Pablo Hernández de Cos.

Thus, it considers that there is little feedback between the inflationary pressures of prices and wages, in view of the current evolution of wages, for which reason it is in favor of using the underlying rate in collective bargaining and for multi-year scenarios. Until February of this year, the salary increase agreed in the agreement stands at 2.3%, above the 1.5% agreed for 2021, but in line with what was agreed for 2019, “in an environment of much lower inflation” Gavilan recalls.

The Bank of Spain considers that the inflation rate would drop to 2% in 2023 and to 1.6% in 2024. Regarding the set of measures implemented by the Government, within the National Plan to shock the economic consequences and of the war in Ukraine, which involve a cut in various energy sources and the setting of limits on the revaluation of rents, would subtract between 0.5 and 0.8 percentage points from the average inflation rate of 2022 and would have a positive impact of 0.2 percentage point in the average GDP growth rate in 2022.

The evolution of the public deficit, after 6.9% of GDP at the end of 2021, is estimated to improve to 5% of GDP in 2022, although two tenths more than the 4.8% forecast in December. The estimate for 2023 also worsens to 5.2% of GDP and a 4.7% deficit in 2024, a worse outlook than anticipated in the previous estimate.

The set of public debt that closed 2021 at 118.4% of GDP, improve your forecasts, since it will moderate this year to 112.6% of GDP, to rebound slightly to 112.8% of GDP in 2023 and 113.5% in 2024.

Regarding the evolution of employment, it estimates that the unemployment rate will end at 13.5%, will drop slightly to 13.2% in 2023 and 12.8% in 2024. In response to a question from the journalists, the Bank of Spain calculates that updating pensions with inflation at 7% would cost some 12,600 million to the public accounts, after the entry into force of the pension reform that supposes the revaluation of the same according to the Price Index to the Consumption (CPI).

Ángel Gavilán explained that, taking as a starting point the approximate spending on pensions in Spain and average inflation for the whole of 2022 of 7% (November over November), each point that pensions rise due to the revaluation represents 1,800 million to public accounts. In this way, the revaluation for 2023 would amount to 12,600 million euros.

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