Bank of Spain drastically reduces 2021 growth forecast

MADRIDFirst it was the Spanish Institute of Statistics (INE), then the OECD and now the Bank of Spain: all three have reduced their growth expectations for the Spanish economy in 2021 and 2022. The Bank of Spain estimates a 4.5% growth of gross domestic product (GDP) for this year, coinciding with the OECD, almost two points under the September forecast (6.3%). As for next year, the agency estimates that the economy will grow by 5.4%, four tenths less than expected in September. In this case, the downward revision is more moderate.

The Bank of Spain's forecasts are much more pessimistic than those of the Spanish government and which have not been revised for the time being. The executive estimates that the economy will grow by 6.5% in 2021 and maintains that it will grow by 7% in 2022. But why is there such a substantial change in the Bank of Spain's forecasts? Sources argue that at that time forecasts were made with advance data from the INE on economic growth in the second quarter and without the data on the third quarter. Both figures suffered considerable changes at the end of September. "Clearly, they were much less dynamic than expected. A negative surprise," Bank of Spain sources acknowledge. It should be noted that the Bank of Spain report relies "exclusively" on INE data.

The main reason for these downward revisions is the prolongation of a number of factors that are generating "much uncertainty", sources at the Bank of Spain admit. They highlight the high inflation rate resulting from the upward spiral in energy prices, which has slowed this November. They also highlight bottlenecks generated by the disruption to supply chains, an element that is especially affecting the industrial and automotive sectors and, finally, private consumption, i.e. demand has slowed down much more than expected. The delay in the arrival of European funds is also a factor. All this is combined with the emergence of new coronavirus variants, which do not allow a "complete normalisation" of economic activity, and supervisory agencies warn that they will have to be taken into account when making predictions.

The only positive note in the Bank of Spain report is the forecasts for 2023 and 2024. In both cases, the Spanish economy would grow much more than expected. In 2023 it would grow by 3.9%, almost two points more than predicted just three months ago, while in 2024 the Bank of Spain estimates that the economy will grow by 1.8%. The reason for this optimism is the result of the delay in the execution of European funds. While the supervisory body notes that this year and next year they will not have a major impact, this would change in 2023 and 2024.

Consumption plunges

The Bank of Spain has considerably reduced its forecasts for domestic demand, the main engine of the economy. While in September household spending on goods and services stood at 9.6% of GDP, it is now down to 4.5%. This is due to household savings: the supervisory body estimated a few months ago that families would be able to save more, which is no longer the case. In fact, the Bank of Spain predicts that the average savings rate will not recover pre-covid levels until 2023.

Rising inflation

Like the rest of Europe, in recent months prices have risen across the eurozone to levels unseen in the last decade. Although the Bank of Spain insists that the situation is "temporary", they admit that it is having an impact on the economy. Bank of Spain sources explain that at this time we would be "at the peak", but that by next spring energy costs are expected to have fallen and cause a fall in inflation rates.

As on other occasions, the Bank of Spain reiterates that we must avoid workers' salaries and pensions rising at the same rate as rising prices. In fact, it admits that this is not happening. A rise in wages equivalent to the increase in the consumer price index (CPI, the indicator that calculates the evolution of prices in the shopping basket) would mean "a loss of competitiveness" of the Spanish economy internationally, the agency notes.

The paradox of employment

Economic analysts remain surprised by the fact that there is a gap between GDP growth and the evolution of employment and revenue collection. While the first element is expected to increase less, the other two are evolving positively. This is acknowledged by the different bodies, as can be seen in the latest labour force survey. Specifically, in the State as a whole, a total of 19.7 million people are in a job (109,451 more than in October), which is the highest ever recorded. "There is no satisfactory answer to help us understand it," sources at the Bank of Spain acknowledged, adding that it is necessary to wait to see how the economy evolves.