Spanish economy continues to recover from covid, but at a slower pace

The Spanish economy continues to recover from the effects of the pandemic, but at a slower pace. Thus, between January and March this year GDP increased by 0.3% compared to the last quarter of 2021, a growth rate 1.9 points lower than that recorded in the previous quarter, according to data published on Wednesday by the National Statistics Institute (INE).

The Spanish gross domestic product (GDP, the indicator that measures the economic activity of a territory) closed the first quarter 6.4% above the same period last year. However, it has not yet recovered all the ground lost to the pandemic: when compared to the fourth quarter of 2019 – the last before the arrival of covid – economic activity in Spain was still 3.6% lower.

The slowdown in growth, then, was abrupt. After growing by 2.6% and 2.2% in the third and fourth quarters of last year, the 0.3% recorded between in January and March this year represent a drop in the pace of growth, although economic activity has not been destroyed. "It can be summed up in two words," explains Josep Lladós, a professor of economics at the UOC and member of the Economists's Association of Catalonia. "The first is slowdown and the second is worrying".

The main cause of the slowdown is the fall in household consumption, which, compared to the previous quarter, fell by 2.6% after nine consecutive months of growth. This decrease is due, according to Lladós, to the "effects of inflation on consumption".

Inflation is the increase in prices. In recent months, the CPI – the indicator that measures the evolution of the cost of living – has been at its highest levels in the last 30 years, which has affected consumers' pockets, who have reduced spending. Firstly, because price increases entail a drop in purchasing power and, secondly, because uncertainty encourages citizens to spend less and save more.

However, Lladós believes that inflation should fall in the coming months thanks to government intervention. The Spanish government has approved several measures to contain prices, especially energy prices, which have caused the sharp rises and ended up affecting companies' production costs. In the end, they have been forced to pass them on to consumers in final prices. The economist also considers that the loss of household purchasing power will be a "cause for concern" so long as there is no "deal on income" between workers and companies.

In addition to the effects of inflation, it should also be taken into account that, since the pandemic broke out, the INE is having more difficulties in collecting data, especially on consumption. In fact, it has already had to redo last summer's data, when it initially announced that consumption had fallen and a few months later corrected itself. In this sense, the data published this Friday is only a first estimation, and the definitive data will be publisihed towards the end of June, when the INE will also break it down regionally.

Industrial activity falls

Another element of concern is the fall in industrial activity. Industry had been one of the engines of growth during the second half of 2021, but with the arrival of 2022 it has fallen into negative numbers: in the first three months of the year, industrial activity fell by 1.4%.

The industry is still affected by "supply bottlenecks," a problem that has been dragging on since last summer and which, due to new restrictions against covid in China, "will not be resolved until the fall," Lladós notes. The closure of the port of Shanghai has affected the main sectors' logistics chains, since a large part of industrial production depends on China, where the manufacture of many components and intermediate goods is concentrated.

Investment stretches upward

Despite the poor figures in consumption and industry and the "vulnerable situation", the Spanish economy continues to recover, Lladós says. The main driver is business investment, which grew by 2.4% compared to the previous quarter. Of particular note was investment in machinery and equipment, which shot up by 7.3%. This investment is due to the "digitisation process" in many sectors, which will lead to "productivity gains" in the medium and long term, the economist adds.

Exports were also a source of growth, not so much at the level of goods – due to the aforementioned lag in industrial markets – but services, i.e. tourism. The almost total lifting of health and mobility restrictions has allowed a strong recovery in the hotel, restaurant, leisure and cultural sectors, thanks to the arrival of foreign visitors, but also to the consumption in these areas by the local population.