Consumption continues to show signs of weakness due to inflation that could close 2022 at 8%, according to the entity’s research department
BBVA’s research service has also revised down its 2023 GDP growth forecasts for Spain from 3.3% to 1.8%, although it maintains the 2022 outlook at 4.1%. These new calculations, published this morning, are practically the same as the European Commission’s for this year, although they differ by 0.3 tenths for next year.
The reason for this deterioration is explained by the scarcity of some commodities, the increase in their price and the recent transfer observed of this increase in production costs to the whole basket (Spanish inflation ended June at 10.2% yoy – years), as well as the expected recovery in corporate and household financial burdens as the European Central Bank (ECB) makes progress in withdrawing monetary stimulus, as indicated in the latest report ‘Situation Spain’, presented by Jorge Sicilia, director of BBVA Research and Chief Economist of BBVA; Rafael Doménech, Head of Economic Analysis; and Miguel Cardoso, chief economist for Spain.
Spain’s GDP growth has slowed in the first six months of 2022 compared to the second half of 2021. The advance of the first quarter – when the Russian invasion of Ukraine began – was 0.2% per quarter and will be about 0.6% in the second quarter are significantly lower than projected quarterly gains of 2.6% and 2.2% in the third and fourth quarters of last year, respectively.
BBVA Research points to the decline in household consumption in this first half of the year. In any case, the slowdown in the central part of the year will be less than expected three months ago, which will partially offset some of the headwinds seen after the summer. In addition, disruptions in global value chains continue to limit the supply of certain goods, such as cars, whose sales have fallen by as much as 50% since 2019.
According to BBVA Research, household spending has been negatively impacted by the rise in the price of raw materials and semi-finished products, especially fuel and electricity. In addition, the likelihood of a gas scarcity scenario in Europe has increased, leading to ongoing revisions to the outlook for its costs.
The new upward revision of the gas price could deduct an additional 0.1 to 0.2 percentage points from GDP growth in 2023. Here comes, after a period of containment between 2020 and the end of 2021, a higher pass-through of the increase in production costs to final prices, as companies found that the increase in input costs would take longer than initially expected. As a result, inflation continues to surprise positively and is no longer limited to a few CPI components. The core, which comprises 82% of household goods and services, could rise even more in the second half of the year and average close to 6%.
On the other hand, households do not use the wealth accumulated during incarceration to consume at the expected rate. The Ministry of Economic Affairs has always quantified the money that families have saved after the corona virus at around 50,000 million euros. But uncertainty about the evolution of the economy and the rise in inflation may cause households to postpone certain decisions or even encourage investment in sheltered housing.
Experts at BBVA Research also analyze the discrepancy between Spain’s GDP figure, which still hasn’t recovered all that was lost during the pandemic, and the greatly recovered employment rate. And he blames it on the low productivity growth per employee. His analysis shows that this may be a direct result of higher job creation in some service sector activities and the level of the unemployment rate, the lowest since September 2008. On the other hand, the impact of the employment reform, which has led to a increasing the percentage of discontinuous permanent contracts can sustain job creation, but with a lower intensity of hours worked.
Despite the downward revision to forecast GDP growth for 2023, BBVA Research economists maintain that the recovery is set to continue for the time being and that inertia is positive for the third quarter of this year. They expect the slowdown in activity to be limited and short-lived, due to several factors. First, the wealth accumulated during the incarceration could support consumption in the coming quarters, despite the risks posed by the economy, and mitigate the impact of several of the negative elements described earlier, or could be used for the buying a house. Second, the implementation of the Next Generation EU (NGEU) funds could accelerate in the coming quarters. Finally, the positive effects of the labor reform could contribute to the development of consumption, especially among the youngest, as well as boost productivity.
Hiring data suggests that regulatory changes are reducing the weight of temporary work, especially among those under 25. Greater job security could reduce precautionary savings among these types of workers or increase their willingness to borrow. In addition, a more stable employment relationship could increase the incentives to invest in the human capital of the people hired.
At the same time, BBVA Research predicts that variation in CPI will remain high, averaging close to 8% in 2022 and 3% in 2023. More “worrying,” the report indicates, may be the trend of the underlying, which could can reach an average of 5% this year and 4% the following year.
If the ECB definitively raises interest rates, estimates by BBVA Research point to a direct negative impact of seven and three tenths on Spain’s economic growth in 2022 and 2023 respectively. slow down activity of the Spanish economy (-0.8 points for the whole biennium).
In any case, the report ‘Situation Spain’ indicates that the Spanish economy is better prepared than in previous recession periods due to the rise in interest rates. Household and corporate debt has been significantly reduced in recent years and is currently at a level comparable to that of the rest of the eurozone countries. In addition, the private sector has built up assets that can help mitigate the impact of a higher financial burden. The situation of the public sector can be more vulnerable, with high debt thresholds.
The experts at BBVA Research include in their report an initial assessment of the measures announced by the government in the latest State of the Nation Debate, all presented as transient. The temporary release of some public transport is a measure that will help alleviate inflation costs and reduce energy demand, and is more selective than the fuel subsidy. It seems a missed opportunity not to have eliminated this support for the consumption of non-renewable energy and to use the resources to increase support to households, the self-employed and businesses particularly affected by the rise in the price of gasoline and electricity. Regarding the announcement of sectoral taxes, BBVA Research believes that “it makes no sense to penalize specific sectors, such as banking”, which does not generate negative externalities in the rest of the economy, but quite the opposite: it facilitates the allocation of production resources to the most dynamic and fastest growing sectors.
Source: La Verdad
I’m Wayne Wickman, a professional journalist and author for Today Times Live. My specialty is covering global news and current events, offering readers a unique perspective on the world’s most pressing issues. I’m passionate about storytelling and helping people stay informed on the goings-on of our planet.
