After the weakening of world economic activity in the last stretch of 2022, although to a lesser extent than expected, in the first months of 2023 the global economic context shows incipient signs of improvement. If last year the worst omens did not rule out that the large European economies could enter a slight technical recession, in the early stages of the year the outlook is less pessimistic. This slight improvement, together with the abandonment of the zero Covid policy in China, has caused many analysts to recently revise their forecasts upwards not only for the first quarter, but for the year as a whole.

However, it should not be ruled out that the recent financial uncertainty could negatively affect GDP growth, although it could help contain the upward trend in inflation.

Under these conditions, the Bank of Spain has submitted its ‘Quarterly report and economic projections of the Spanish economy‘, in which he warns of a gradual strengthening of economic activity in the coming quarters. It contemplates that in the first quarter of the year, the favorable evolution of affiliation to Social Security and the improvement of confidence indicators guarantee that the GDP could have increased slightly to 0.3%, one tenth more than the data advanced by the National Statistics Institute (INE) in the fourth quarter of 2022.

For the year as a whole, it estimates that GDP will increase this year by 1.6%, compared to the increase of 5.5% at the end of 2022 in real terms, which is 3 tenths more than the previous December projections, where it was estimated a growth of 1.3%. The explanation lies in the weakness of activity in the second half of last year, which would exert a negative carryover effect on the average growth rate of GDP in 2023, without this weakness being offset by the higher growth expected for the rest of the year.

However, it corrects the growth forecast for 2024 downwards, until placing it at 2.3% compared to the 2.7% estimated in December, while keeping the momentum of GDP for 2025 unchanged at 2.1%. With these forecasts, Spanish GDP will recover its pre-pandemic level in the second half of this year.


However, this evolution of the Spanish economy will not be without risk. Although the report prepared by the Bank of Spain was closed a few dates before the outbreak of the banking crisis in the US and its transfer to Switzerland, it launches a notice in which it states that “it seems likely” that the uncertainty generated by the recent crisis in banking entities that began in the US by Silicon Valley Bank and in Switzerland by Credit Suisse, “will have a certain adverse effect on the development of economic activity in the coming quarters and also contribute to weakening the inflationary dynamics.

These risks, therefore, are oriented downward in terms of economic activity and balanced with respect to inflation, according to the supervisory body. The main risk, downward for activity and upward for inflation, continues to be linked to possible geopolitical developments in the war in Ukraine, to the extent that these could give rise to new negative supply shocks similar to those suffered for a good part of 2022.

Other existing risks in the international arena, although uncertain, may arise from the reopening of the Chinese economy on activity and inflation in third countries, such as Spain. In the purely domestic field, uncertainties remain about the possible contribution to private consumption of the savings accumulated by households during the pandemic, and about the rate of execution of the projects associated with the European funds program Next Generation EU and its ability to increase the potential growth of the economy.

Job creation will continue in line with the progress of activity. The increase in employment will allow that despite the increase in the active population, the unemployment rate will continue to decline. It estimates that the unemployment rate will close this year at 12.7% of the active population, improving by two tenths the previous estimate of December, presenting a slightly downward trend for the next two years to settle at 12.3% and 12 % respectively in 2024 and 2025.

Food prices will remain high

Regarding the evolution of prices and costs, he points out that the significant reduction in the prices of energy consumer goods in recent months has caused this component of inflation to show negative variation rates since the beginning of year, especially the price of gas. Despite this, the general inflation rate reached 6% in February, interrupting the downward path experienced between July and December, driven by significant increases in food prices.

Despite everything, the Bank of Spain contemplates a gradual moderation of the rates of change of the general harmonized index of consumer prices (HICP) from their current levels. By 2023, the inflation rate will fall, in annual averages, from 8.3% in 2022 to 3.7% in 2023.

As explained by the General Director of Economy and Statistics of the Bank of Spain, Ángel Gavilán, the analysis that has been carried out of the headings of food in the IPCA for January suggests a transfer of 90% of the VAT reduction of certain foods to consumer prices. However, in February “they already had the same rise profile as the rest of the foods not affected by the VAT reduction, with which it seems that this transfer of 90% is maintained.”

For Gavilán, throughout 2022 food prices showed similar growth rates in Spain and in the EMU as a whole. However, the contribution of food to the inflation rate in Spain was higher than in the euro area, due to its greater weight in the consumption basket of Spanish households, 25.1% compared to 20.9%. To a large extent, he maintains that the increase in food prices reflects the gradual transfer to prices of the cost increases that producers have experienced in recent quarters.

“The price of food is already at historical levels of 16.6% in February and will close on average at 12.2% this year compared to the previously estimated 7.8%, although we think it will reach peak levels throughout 2023 Gavilan explained.

The completion of the main measures deployed by the Government to mitigate the effects of the energy crisis by the end of 2023 will prevent further significant reductions in the average headline inflation rate from being observed in 2024. The acceleration of the energy component will practically compensate for the slowdown that is anticipated in core and food inflation, such that headline inflation in 2024 will remain at 3.6%, before falling again in the last year of the projection horizon, 2025 to 1.8%. Regarding the underlying rate, it is expected that this year it will moderate to 3.9%, so that in 2024 it will drop to 2.2% and 1.8% in 2025.

Public debt will reach a ratio of 111.1% of GDP at the end of this year, a slight increase compared to the previous estimate of 110.6%, while it estimates 108.8% for 2024, the first year in which they will be put again. In the European Union (EU) as a whole, the fiscal rules suspended after the appearance of the Covid-19 pandemic and which set a maximum public deficit of 3% of GDP and a debt ratio of 60%, which will have to be be revised to adapt it to the particular situation of the country, although with an objective of moderation in the medium and short term. For 2025, it estimates a slight increase to 109.9% of GDP.

The Organization for Economic Cooperation and Development (OECD) published its new economic forecasts last Friday. In them, the body improves by four tenths, up to 1.7%, the increase in Spanish GDP for 2023, the same advance that it projects for a year later. It also lowers by several tenths, to 4.2% and 4%, the general CPI rate forecast for 2023 and 2024. On the other hand, it increases the underlying rate forecast for this year to 5%, which would moderate until 3 .7% already in 2024.

The European comparison offered by the data, however, places Spain in a more favorable relative position than the rest of its neighbours. The growth of the other three large community economies is between 0.3% and 0.7% for 2023, with an average in the Eurozone that does not reach 1%. The general CPI is also expected to be lower in Spain than in Italy, France and Germany. The tables turn when analyzing the underlying indicator, which has become Spain’s weak spot. In 2023 it is France who presents the best prospects. In 2024, of all the large economies analysed, including the United States or the United Kingdom, Spain is the one with the worst outlook.

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By Nail

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