The rating agency estimates that the risk of a recession is “not completely ruled out” in the eurozone and calls on governments to take action on employment to reduce the social security shortfall
Labor market resistance, lower supply chain risks and some price containment in the global economy have obscured the worst omens that overshadowed the global economy several months ago. However, the economic slowdown is a fact and, especially in the Eurozone, few dare to throw their hands into the fire because of forecasts that are heavily influenced by the uncertainty that still persists about the course of the war in Ukraine.
In this scenario, the rating agency S&P Global presented its economic forecasts on Thursday, acknowledging that “the risk of a recession has not been completely ruled out”. In the Spanish case, they estimate that the economy will grow by only 0.9% in 2023, which represents a sharp slowdown compared to the growth of more than 5% that the government estimates for last year (which the agency lowers to 4. 6%).
However, the forecasts for Spain are better than for other countries in the region. And one of the fundamental factors for this is the lower dependence on Russian gas. This is one of the reasons that also invites optimism in Europe, where reserves currently stand at 90%. This is very important because, despite the cold, reserves should still be above 50% at the end of winter, which would facilitate efforts to replenish those reserves and avoid the risk of shortages. to the analysts.
To avoid the recession, there are two risks to watch: inflation and the rise in interest rates by the European Central Bank (ECB) to stop it and, also in the case of Spain, the state of government accounts , with high debt and deficit levels that could become a problem in the event of new unexpected shocks. And it is that Spain, after a record year for European public finances, with historic income figures thanks to the resistance of the labor market in the face of the crisis and the effect of inflation on certain taxes, will reach 2023 with serious fiscal challenges, including where the control of the shortage of social security is striking.
Experts estimate that 15 billion would need to be added by 2023 to have a real figure for that deficit gap, which would amount to about 1.8% of GDP. They remember that covering the social security shortfall by the state, as is the case with transfers in Spain, is a very common practice in many countries. And at this point they are calling on the government to take action on employment, apart from the pension reform, to close that gap. “One of the solutions in the Spanish case would be to reduce unemployment in order to increase contributions,” they indicate.
They believe that the problem of the social security shortage is common in Europe. “All countries are aging and that has to do with demographic changes. Reforms beyond pensions are needed to make social security systems sustainable. “At the moment that is not the case,” they warn.
As for inflation, Marko Mrsnik, the company’s Director of Sovereign Ratings, estimates that it will moderate during the year – not the underlying – and that the ECB will raise interest rates to 3%, compared to 2.5% at this point. moment, indicating that “financing conditions will be more difficult and a problem could arise for families and companies with large financing needs”. Their projections suggest that inflation in the Eurozone will not fall below the 2% target at least in 2025.
With this perspective, they foresee that after the peak of 3% that could be reached mid-year, the first rate cut will come in 2024 and “reach a balance between 2% and 2.25%”.
At this point, and while consumption was stronger than expected last year, experts acknowledge that the household savings rate is starting to decline and there is less to further drive this key economic growth driver, “particularly given that interest rates are rising to get into the pocket of citizens and the ability to consume will be less, ”they emphasize.
The rating agency, which will publish its note for Spain on March 17 with no changes in sight, is also closely following the evolution of the Spanish banking sector, given the dependence of the entities on the country’s economic evolution. Luigi Motti, Head of Analysis for EMEA Financial Institutions at the firm, explains that the portfolios with the highest default risk are those of loans to small and medium-sized businesses in sectors that are more energy intensive and in consumer protection. credit portfolios.
Faced with these risks, the exposure to these portfolios is “quite limited and the entities have already identified these clients, who are already included in phase 2 – where the bank takes out the credits that are starting to give the first alarms, although they are not in have fallen into default – that is, they have already been supplied.
The company also does not expect an increase in delinquencies in its mortgage portfolios. “Households are reaching this stage of the cycle with historically high levels of savings and much more limited debt,” explains Motti, who also recalls that in recent years most mortgages have been at fixed rates, loans that are less exposed to the rise of the Euribor. .
“The main variable for mortgage payments is employment and from that point of view, we don’t expect an increase. Households’ ability to meet mortgage payments will remain at a satisfactory level,” he stressed.
Another element that favors banks is the rate hike environment. According to S&P, the industry’s interest margin points to an average increase of 20% in 2023, giving it more strength to absorb rising operating costs due to inflation. A situation that has also been mitigated by recent years of adaptation of offices and staff in the sector.
Currently, the ability to manage the margin difference between loans and deposits, in an environment where the company believes customers are pushing for the remuneration of their savings to be improved.
Source: La Verdad
I’m Ben Stock, a journalist and author at Today Times Live. I specialize in economic news and have been working in the news industry for over five years. My experience spans from local journalism to international business reporting. In my career I’ve had the opportunity to interview some of the world’s leading economists and financial experts, giving me an insight into global trends that is unique among journalists.
