Economic slowdown: IMF and Spanish government worsen forecasts for 2023

BarcelonaThe Spanish government has kept the economy's growth forecast for this year unchanged, but has had to slash its forecast for 2023, the official quarterly macroeconomic review reveals. Economic vice-president Nadia Calviño has justified the reduction blaming the current economic situation at world and European level, very affected by the war in Ukraine and the increase in the price of energy and raw materials it has caused.

The reduction coincides with a similar change this Tuesday by the International Monetary Fund, which has once again lowered its growth forecasts for the Spanish economy for this year and the next, as it did last April.

In fact, last April, the Ministry of Economy already cut its forecast for 2022 GDP growth from 7% to 4.3% for this year. This figure has not changed in the July revision presented this Thursday by Calviño. However, the rate forecast for next year has been cut by 0.8 percentage points to 2.7%.

As for the IMF forecasts, the organisation foresees clearly positive growth figures of 4% in 2022 and 2% in 2023, according to its quarterly macroeconomic forecast report published on Tuesday. However, more recent predictions in last April were 4.8% and 3.3%, respectively.

Calviño insists on "strong" growth

At the press conference following the cabinet meeting, Calviño indicated that the current context is one of "high uncertainty" and that it is marked by the "inflationary pressures affecting Western economies", derived above all from the rise in energy prices that has caused sharp price rises for months.

In spite of this, the Vice-president highlighted the "strong growth" of the Spanish economy, thanks –she added– to the "recovery of investment", which was at a standstill during the two years of the pandemic and has now been boosted by the European funds, and to the "strength of Spanish companies' exports", despite the fact that the Spanish trade deficit with foreign countries has worsened due to the increase in the price of energy. Even so, what Calviño highlighted most as a sign of optimism is the good evolution of the labour market "thanks to the labour reform", with more permanent contracts and "a strong pace of employment growth", despite the fact that in the second half of June there has been "a slowdown".

The macroeconomic picture is one of the elements which is part of the stability programme that EU governments have to send to Brussels as part of the community fiscal regulations. In this plan, the state executives detail their forecasts for the evolution of the economy and, by extension, of the state's coffers. In addition, the macroeconomic predictions also help the government draw up the state budget and to set the expenditure ceiling.

The government has published the forecasts without waiting for the official data on economic growth for the second quarter, which the National Statistics Institute (INE) will publish this coming Friday. That same day the INE will also release the advanced data for July of the consumer price index (CPI), which measures the evolution of the prices of consumer goods and services.

The IMF is pessimistic

The downgrading of growth forecasts for the Spanish economy, however, is not an exception. The IMF has also published a revision of its growth forecasts with reductions in most countries around the world and at a global level. The institution expects world GDP to increase at a rate of 3.2% this year, 0.4 less than the April projection, and 2.9% next year, 0.7 less than what was announced three months ago.

The agency headed by Kristalina Georgieva justifies the cuts to the forecasts through the context of delayed activity at the global level. A delay that is caused by the uncertainty created by the war in Ukraine; the escalation of energy prices and raw materials; China's slowdown, a hypothetical food crisis in developing countries, and supply bottlenecks created in the economic reactivation after pandemic restrictions were lifted.

Among the major EU countries, France has smaller reductions than Spain (0.6 and 0.4 percentage points in 2022 and 2023), while Germany is the most adversely affected due to its economy's heavy dependence on Russian gas dependence of its economy on Russian gas. This year, the IMF expects German GDP growth rate to 1.2%, compared to the 2.1% it announced in April. Next year's forecast is for 0.8%, when three months ago it was 2.8%.

On the other hand, the international institution improves its forecast for Italy by 0.7 percentage points – up to 3% for 2022 – but for the following year it lowers it by one point to 0.7%.

"Growth in the euro area has also been revised downward," the IMF's forecast report notes. The document notes that "improved prospects for tourism and industrial activity in Italy are more than offset by significant declines in France, Germany and Spain." The reasons are the repercussions of the Russian invasion of Ukraine, as well as "the assumption of tougher financial conditions" due to interest rate hikes the European Central Bank will approve from July until the end of the year if inflation remains high.

As for the global economy, the IMF has cut growth forecasts for the United States sharply: the IMF expects it to grow by 2.3% this year and 1% next year, figures 1.4 and 1.3 points lower than those projected in April, respectively. The IMF also warns that "the slowdown in China persists" due to the strong incidence of the coronavirus in the country and the restrictive control measures still applied by the Chinese authorities, a fact that has been causing disruptions in industry and docks for months, which have had a negative impact on the world economy.