The Spanish economy, like practically the entire western world, will trade in the red until 2023. The OECD, CEOE, Santander and the General Council of Economists have lowered their forecasts and Bank of Spain, BBVA and CaixaBank will soon do so. The phase of strong economic growth triggered by the Covid pandemic is over: According to the World Bank, 90% of the developed countries have revised their forecasts downwards.
The war in Ukraine and the resulting crisis in the energy market have generated inflation rates that have led to rising interest rates. It remains to be seen whether this growth slowdown will turn into a recession: two straight quarters of contraction in the economy.
World Bank economists warn that all economic indicators that normally go awry before recessions are now pointing down. Global Growth, Construction Orders, Financial Market Conditions and Consumer Confidence. All of these variables point in similar directions to all recessions since 1970.
All OECD economies are currently growing at an annual rate. In a quarterly rate, nine register a fall in GDP compared to 29 countries that are growing. But as the World Bank warns, any eventuality, even a moderate one, could push economies into clear recession. In early September, EU Economic Affairs Commissioner Paolo Gentiloni said the risk of a recession was “obvious” but not “inevitable”.
One of the alarm signals, perhaps the most far-reaching, is the US economy. Analysis, conducted by the World Bank and based on the recessions of the last half century, estimates that if the world’s leading economy shrinks, the chances of the world entering rise recession rose from 9.6% to 71.4%.
The US economy is not only the largest importer of goods and services, but also the key to the world’s financial markets. Interest rate hikes in the US increase financial stress in the rest of the world and increase the cost of borrowing.
In fact, the country has already chained two quarters of GDP declines, -0.6% and -1.6% in the first half of 2022, but the panel responsible for determining whether it has slipped into recession NBER (National Bureau of Economic Research) did not comment. The Federal Reserve announced last Wednesday that it expects growth of 0.2% for 2022, down 1.5 points from the last projection in June.
situation in Spain
The doubts are bigger in Spain. Currently, the Funcas forecast panel, which compiles the consensus of the research services, forecasts only a quarterly decline in GDP, the fourth (-0.2%), but expects a very small increase of 0.1% for the quarter just ended. The INE will publish its first estimate on October 28th. For 2023, experts forecast 0.3% between January and March and a gradual improvement from there, closing the year at 1.9%.
In this sense, the President of BBVA, Carlos Torres, assured at the end of September that the company expects a “slight” recession in Spain early next year. So the question for the end of this year and the beginning of next is whether the slowdown will translate into recession, stagnation or a simple slowdown. The slowing of the economy, yes, will help curb inflation, policymakers have recognised.
Oriol Aspachs, director of Spain’s economy at CaixaBank Research, points out that there are two forces working in opposite directions that can determine the direction of the slowdown. On the one hand, the export of goods and services abroad is improving, especially tourism, which has picked up very well this summer; on the other hand, there are first signs of weakness in private consumption.
Which of these two forces weighs more can make the difference in walking the fine line between avoiding a recession or not, although Aspachs warns: “A technical recession can be -0.1% growth for two consecutive quarters or -5% . The growth forecast is around 0%, so I would call it stagnation or standstill, not recession.”
uncertainty
Whether or not there is a recession, it is clear that there is one key near-term factor on which no government can enact public policy and anticipate inflationary evils: energy. In that sense, Spain is not as exposed to Russian gas cuts as northern European countries. Experts warn that gas will probably have to be paid for more expensively, but there is no risk of rationing as in countries like Germany.
Energy costs are a huge burden for the European locomotive industry. The PMI, the index that measures manufacturing orders, fell to 48.3 in the latest data for September from 59.8 in February – below 50 points is considered a contraction. The major German economic institutes (Ifo, NRW, IfW and IWH) forecast last week that Germany will see gross domestic product growth of 1.4% this year but will enter a recession in 2023 with a 0.4% contraction. .
Indeed, the contagion of European partners is one of the big worry factors for Spain, especially considering that tourism and external demand have buoyed the economy this summer. The overseas sector contributed 4.9 of the 6.8 percentage points to GDP growth year-on-year, and six-tenths of the 1.5 point growth from the previous quarter.
The other big uncertainty is interest rates. The ECB has been raising the bid price to 1.25% since July. Bank of Spain Governor Pablo Hernández de Cos pointed out that the increase could reach as much as 2.5% in a bid to curb inflation, with the counterpart of dampening economic activity. The Director of the Spanish Chamber’s Studies Service, Raúl Mínguez, affirms that it is important that monetary policy “anchor inflation expectations and ensure that inflationary pressures are reduced in a sustainable manner”. However, BBVA Research’s chief economist for Spain, Miguel Cardoso, assures us that “rates of around 2-3% on income would be acceptable”.
Heading into a recession?
Cardoso assures that the drop in activity is “inevitable”. However, the economist believes that the problem is not so much about growth falling below 0%, as everything points to recession being controlled in the event of a recession (waiting and seeing how inflation develops).
The fundamental question, he says, is whether the recovery in economic levels from before the pandemic could be extended to late 2023 or even 2024. “It’s not so much what’s being lost as what we’ve stopped growing without being in this situation,” says Cardoso. In terms of employment, on the other hand, Spain regained its pre-pandemic levels months ago.
Cardoso is not particularly negative as he expects the economic slowdown to dampen inflation and take the pressure off central bankers. “It will be difficult for businesses to pass through prices a significant part of the increase in costs and for unions to demand full inflation compensation, with which most likely [la caída de actividad] does some of the work for the ECB and doesn’t have to raise interest rates as much.”
tax career
The BBVA’s chief economist for Spain, Miguel Cardoso, affirms that we are seeing energy prices continue to rise and that we must therefore “get used to being energy efficient as soon as possible”. “We save best when we realize that we are dealing with a scarce commodity. We’ve gotten poorer and it’s irresponsible to try to maintain living standards as government debt mounts, not knowing how much that’s going to cost us in the medium and long term,” he asserts. And he concludes that “we should get away of indiscriminate solutions that subsidize consumption regardless of income”.
Middle
For the director of the Studies Service of the Spanish Chamber, palliative measures to “cushion” the effects of inflation on households and companies, as well as European funds, are key for the coming months. “Next-generation EU funds have a crucial role to play in the context of uncertainty,” he says.