The Canary Islands economy will grow by 2.8% in 2023, twice the rate in Spain, and will maintain its momentum in 2024, with an increase of 3.3%, with the creation of 69,000 jobs in these two years and a reduction in the unemployment rate to 14%, all due to the boost from the tourism sector, according to forecasts by BBVA Research.
These economic forecasts also face some risks, such as rising prices in the hotel sector (14% more than in 2019), which reduce the competitiveness of the sector, and the exhaustion of the effect of deconfinement on Europeans’ desire to travel, as well as the containment of consumption due to the rise in underlying inflation and the increase in interest rates.
BBVA Research calculates that in 2022 the Canary Islands’ GDP will grow by 10.7%, while the Spanish economy grew by 5.5%.
According to the presentation of the report on the situation of the Canary Islands in 2023 by the chief economist of BBVA Research, Miguel Cardoso, inflation and the lower dynamism of tourism have generated a slowdown in growth since mid-2022 that continues in the beginning of 2023.
This slowdown is expected to be short-lived, until uncertainties about the evolution of energy prices or interest rates are cleared towards the middle of the year, so that between the end of 2023 and 2024 the levels of activity prior to the pandemic are recovered.
Another differential factor with the previous crisis is that there are no imbalances between sectors, as was the case with housing in 2008, affected by over-indebtedness and the oversupply of new housing.
Cardoso pointed out that in Spain as a whole there is no imbalance between housing prices and per capita income, as was the case between 2004 and 2012, but there is in the case of the Balearic and Canary Islands, where supply restrictions and the second home market put pressure on prices.
The implementation of the European Next Generation EU funds, which is later than expected, should contribute to GDP growth over the next two years, as in the case of the Canary Islands the funds allocated up to November represent 5% of GDP, while the Spanish average is 2.7%.
In general, Cardoso pointed out, the dynamism in the execution of the Next Generation funds is below expectations and more in line with the execution of the structural funds. BBVA considers it necessary for the funds to reach the private economy, which is still happening slowly, so that in 2022 approvals for non-residential construction were 13 points below the pre-pandemic level.
Although the coming months are expected to see a slower recovery in tourism, affected mainly by the fall in the real disposable income of households in the markets of origin, this sector will continue to be the mainstay of the recovery in the islands, and not so much the European funds, as in the rest of Spain, where it will account for half of the increase in GDP.
The report specifies that the forecast economic scenario may be affected by doubts about the evolution of the tourism sector, as the loss of competitiveness due to the rise in prices could be compounded by an adjustment in demand due to the fall in household income and possible changes in consumption habits.
In the event of a slowdown in tourism demand, the sector should correct margins, warns BBVA Research. Changes in air transport supply are another factor of uncertainty, as the price of international flights in the Eurozone have increased by 33%. In the labour market there are also risks for companies, according to the report: if inflation persists there may be “wage tensions”, in addition to the fact that an eventual acceleration of activity linked to European funds may generate “a shortage of adequately trained human capital”.
The report also warns about the sustainability of the Canary Islands’ public accounts, as BBVA forecasts a deficit of around 0.5% of regional GDP in 2022. “If there is more financial burden and the financing system is not changed, this could generate more imbalances in the public accounts of this community,” says BBVA Research.