Bank of Spain downgrades economic growth forecasts even further

MADRIDAlmost two months after publishing its macroeconomic forecasts for the next 3 years (2022, 2023 and 2024), the Bank of Spain (BdE) announced that it would revise them downwards. The duration of the war in Ukraine, inflationary pressure and, in particular, the increase in core inflation –the increase in prices without taking into account energy and food– as well as a growth of the economy in the first quarter which was more timid than expected, have led the supervisory body to forecast an increase in GDP of 4.1% in 2022 (0.4 percentage points less than in April, when it forecast growth of 4.5%). Thus, the BdE's projection is in line with that of the OECD (4.1%) and the European Commission (4%) and is slightly more pessimistic than the Spanish government's and the State's Audit Office's (4.3%).

Specifically, although the Spanish economy continued to recover from the effects of the pandemic, GDP in the first quarter grew by 0.3%, according to the INE, the Spanish National Statistics Institute (INE). This was well below the last quarter of 2021 and the forecast made by the Bank of Spain in April (0.9%). The main cause of the slowdown has been the fall in household consumption, which, compared to the previous quarter, fell by 3.7% after nine consecutive months of increases, which the Bank of Spain also takes into account. It should be borne in mind, however, that the data is not final and the statistics institute will confirm it at the end of the month. Therefore, it may still undergo some modifications, as happened at the end of 2021, when there was an upward revision of household consumption and, consequently, of economic growth. In any case, the current price pressure does hint at a contraction in household demand, the Bank of Spain notes, which assumes a "worse outlook" for households, particularly the most vulnerable, on the future of economic activity.

The slowdown in economic growth this year will generate a domino effect for 2023, when the agency estimates a GDP rebound of 2.8% (0.1 percentage points less than expected in April). On the other hand, compared to recent forecasts, it adds a tenth of a percentage point more to growth in 2024 and places it at 2.6%.

Despite the differences around GDP, the surprise in the latest forecasts comes from inflation and, in particular, core inflation. Thus, although the Bank of Spain has moderated the increase in prices in 2022 to 7.2% (in April it estimated an average inflation of 7.5%), it increased core inflation to 3.2% (0.4 percentage points more). Moreover, this inflation would remain above 2% on average until 2024, according to the quarterly report published this Friday by the BdE. The main reason is that, although the increase in energy prices was "more moderate", the increase in non-energy products, such as foodstuffs, was higher. However, it should be borne in mind that headline inflation always lasses onto core inflation with a certain lag. As for headline inflation, the Bank of Spain no longer expects it to be around 2% by 2023, but puts it at 2.6% on average, while in 2024 it would remain at 1.8%

Gas cap

In contrast to the projections presented in April, the Bank of Spain has included an estimate of the impact that the gas price cap or "Iberian exception" may have on inflation. The measure will come into force next week, after it received the final go-ahead from Brussels. The agency forecasts that it would help reduce the rate of inflation forecast for 2022 by 0.5 percentage points. Conversely, however, the measure would increase inflation by 0.1 percentage points by 2023. In the eyes of the supervisory body, there would be two reasons: one, its disappearance (it is only in force until May 31, 2023) and the other, the base effect. In other words, the year-on-year comparison once the measure is no longer in force would be made with months in which the mechanism would have helped to bring down the price of gas.

In addition, the impact of emergency measures to deal with the effects of war in Ukraine should be taken into account. The measures will now be extended for a further three months. Without taking into account the measures that need the approval of Brussels, such as the gas cap, the agency has already pointed out that fiscal and energy measures, as well as direct aid, can help reduce inflation by between 0.5 and 0.8 percentage points.

Even so, the Bank of Spain assumes that this scenario is susceptible to change at any time as a result of the uncertain evolution of the war in Ukraine and its economic consequences, both for Europe and Spain. Moreover, in the case of Spain, the current diplomatic spat with Algeria –one of its main energy partners– adds more fuel to the fire.