The Bank of Spain improves the growth forecast for this year by three tenths, to 1.9%

The Spanish economy continues to demonstrate greater resilience than expected.

The Bank of Spain has revised upwards its growth forecast for this year to 1.9%, three tenths more than what it forecast in December.

The GDP expansion in the last quarter of last year was much better than anticipated and the INE has also revised upwards the third and second.

This makes this year's growth mechanically already higher.

Although the projection published this Tuesday represents a slowdown compared to the 2.5% registered in 2023, it improves the 1.6% that the bank predicted just three months ago, despite the persistence of European weakness.

Falling energy prices;

the strength of job creation, although at a more moderate pace than in previous years;

the progressive recovery of real income with salaries rising above what was agreed in agreements;

The increase in the foreign population, and the extension of some Government aid will cause private consumption to grow by 2.3% this year, a little more than last year.

The supervisory body also expects that the rate increases, which are now on a slightly downward path, will have a lesser effect on the economy;

that European demand recovers very gradually, and that the deployment of European funds boosts investment and demand.

However, the Bank of Spain issues a warning in its quarterly forecast report: “The composition of the growth observed at the end of 2023 suggests some elements of weakness.”

The recent acceleration is due to a sharp rise in public consumption and an increase in inventories.

The latter are very volatile and usually fall after having grown.

And the spending of the administrations should not have much scope in a context in which the fiscal rules imposed by European discipline are going to be reactivated.

That is, the rise at the end of the year is due to transitory factors.

Furthermore, the limited progress in productivity and the fall in investment, which according to the bank appears to have a structural imprint, leave the Spanish economy without a basis for robust growth.

If the weakness of these two factors continues, “it could condition the ability of the Spanish economy to maintain in the coming quarters the high degree of dynamism that it presented at the end of 2023,” he points out.

Only the endurance of exports in the midst of European sluggishness is a positive sign.

But the institution warns that this resistance runs the risk of deteriorating due to wage increases above productivity that are making employment more expensive and that, if this trend continues, could lead to a loss of competitiveness and greater persistence of inflation. especially in services.

Industry confidence, the evolution of orders and the bank's company surveys also suggest a fragility of investment at the beginning of the year.

“The accumulation of negative surprises in this component over recent quarters could be reflecting greater structural weakness in business investment than that considered months ago,” says the report, which highlights the collapse of purchases of machinery and industrial goods. equipment.

Despite the European funds, the Bank of Spain predicts that this heading will only rebound by a scant 0.4% in 2024 as a whole. Among the possible reasons, the supervisor mentions uncertainty, the lack of labor, the tightening of the financial conditions, the industry crisis or the fact that the investments of the European funds are not being additional, but are in part replacing what would already exist.

However, investment in housing would maintain a more positive tone, as indicated by sales and construction executions.

And the increases in real estate prices show insufficient supply to meet the needs of demand, the entity emphasizes.

The foreign sector will subtract just one tenth from growth, in a context in which European trading partners are complaining about restrictive financial conditions, a deterioration in confidence and a greater impact from the energy crisis that has worsened the continent's international competitiveness.

Little by little, Europe will recover its demand and draw on Spanish exports, but imports will increase more due to greater national consumption and the need for imports that European funds will generate.

The tensions in the Red Sea, which have led to a certain increase in the cost of transport, and the agricultural protests could somewhat condition the resistance that Spanish sales abroad have shown until now in the midst of the European slowdown.

Unemployment will stop falling with the strength it has been showing.

On the one hand, the bank expects that employment will moderate its momentum as productivity improves.

And on the other hand, the arrival of immigrants will increase the active population.

The combination of both factors will mean that the unemployment rate will not fall below 11% in the projection horizon until 2026. Foreign workers explain part of the boost in employment and have been filling vacancies in sectors with great labor needs such as construction. and hospitality, the report states.

The organization appreciates, despite the high unemployment, a notable degree of tension in the labor market that is being seen in the evolution of salaries.

Although he hopes that these constraints will be alleviated due to the hoarding of workers because companies anticipated vacancy problems.

Strong increase in public consumption

Public consumption has skyrocketed both due to the increase in workforce and the increase in intermediate consumption.

Although there could be a certain transitory impact from European funds, it is almost at the record levels of 2009 if measured as a percentage of GDP once the effect of the cycle has been subtracted.

It has grown considerably more than what the Government itself anticipated in its budget plan and the Commission in its autumn forecasts.

“It is an additional pressure on public accounts and reaffirms the need for a rigorous process of fiscal consolidation,” says the institution.

And he adds that the extension to this year of part of the aid for the energy crisis could require compensatory fiscal adjustments to comply with the spending limit that Brussels demanded for this year, either through expenses or income.

The cost of the anti-crisis package will rise to 9 billion euros this year.

In fact, since no adjustments have been proposed, the deficit will remain at 3.5% of GDP starting next year and the debt will rise again next year and the year after.

The bank expects that with the entry of fiscal rules in 2025, adjustment measures will be taken for income or expenses.

“Its reactivation introduces a notable risk” and “would foreseeably entail a lower degree of dynamism in the forecast horizon,” the document says.

The organization estimates that an annual adjustment of 0.5% of GDP, more than 7,000 million euros with current GDP, would be necessary to leave the debt on a downward path.

If this adjustment is addressed, growth will therefore be lower than that projected now for 2025, 1.9%, and for 2026, 1.7%.

On the other hand, GDP growth would have slowed slightly in the first quarter of the year, to 0.4% quarterly compared to the vigorous 0.6% registered between November and December.

This is indicated by consumption data, affiliation and company surveys, although it continues to be very important growth in an environment of high uncertainty and rising geopolitical risks.

Regarding general inflation, the forecast for this year has been significantly reduced: 2.7% is predicted, well below the 3.3% that was forecast three months ago.

Lower energy prices and the extension of some of the Government's measures have contributed to this - these lower this year's average by 0.3 points.

Even so, there have been upward surprises in food due to the adverse weather, and in the underlying, that which does not include food and energy, due to the costs of clothing and footwear and a minor effect of sales.

This less intense moderation of prices in the underlying “forces us to be cautious before considering the current inflationary episode over,” the document concludes.

The bank also recalls that there are doubts about the pace of execution of European funds and their impact on activity, that credit and automobile sales data show a loss of steam in the consumption of durable goods, and that the strong rebound that boosted the recovery of services after the pandemic.

But in any case it paints a scenario in which the dominant note is a certain improvement in family consumption as the price crisis is overcome and the good performance of employment continues.

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