The Spanish economy seems to be starting to pick up again. On Monday, the European Commission raised its growth forecast for Spain by five tenths of a percentage point to 1.9% and cut its inflation estimate to 4%. This figure is below the EU average, which is forecast to rise to 6.7%.
The improved performance of the Spanish economy is underpinned by the recovery in consumption, the resilience of the labour market, the positive impact of the Next Generation funds, the fall in energy prices and the recovery of the tourism sector. However, there are some risks, such as the possible “adverse impact” of the European Central Bank (ECB) rate hikes on the financial position of households and companies due to the “high level of external, public and private debt”, as well as the risks to inflation of the increases in the minimum wage and other wages.
In addition, the Commission warns that Pedro Sánchez’s government will fail to meet its own commitment to bring the public deficit below 3% of GDP in 2024, the year in which the EU’s fiscal discipline rules, which have been suspended since the outbreak of the pandemic, will come back into force. The budget gap will be 3.3% due to the lack of adjustments and the slowdown in tax revenues.
Even so, despite the risks, Spain will grow more this year than the eurozone average (1.1%) and is ahead of the euro’s major powers: Germany (which is barely 0.2%), France (0.7%) and Italy (1.2%).
Over the course of the year, consumption will recover from the contraction it suffered in the last quarter of 2022 and the first quarter of 2023 “thanks to the continued resilience of the labour market and rising real incomes for pensioners and minimum wage workers”, says the Brussels report.
The continued mobilisation of Next Generation funds “will help sustain investment, especially in non-residential construction”, while falling import prices and the easing of bottlenecks in global supply chains will support a rebound in equipment investment after the sharp fall in the second half of 2022.
The full recovery of international tourism to pre- pandemic levels and the positive effect on competitiveness from lower than expected energy prices will further improve the performance of the external sector,” says the Commission.
This positive scenario is not without dangers, the most important of which is the abrupt rise in interest rates over the past year. “Downside risks to this outlook relate to the adverse impact of tighter financial conditions on the financial position of households and firms, given the high level of external, public and private debt. Moreover, for households, although the bulk of new mortgages are granted at fixed interest rates, the outstanding balance remains concentrated in variable rate loans,” the report notes.
As for the labour market, the EU executive foresees the unemployment rate “remaining high”, although with a “slightly downward” trend from 12.9% in 2022 to 12.7% this year and 12.4% in 2024. Spain will remain the EU’s unemployment leader. After the significant fall in real terms during 2022, wage growth will accelerate this year, although it will still remain below average annual inflation.
For its part, inflation will fall from 8.3% last year to 4% this year and to 2.7% in 2024, thanks mainly to the fall in energy prices and the lower VAT on food prices.
All in all, the public deficit will be reduced “but more gradually than before”, from 4.8 per cent last year to 4.1 per cent this year. Brussels assumes an almost total elimination of energy subsidies in 2024, which will contribute to the reduction of the deficit to 3.3%. This means that Sánchez’s government would fail to fulfil its commitment in the stability programme to bring the deficit down to 3% (the threshold set by the Stability Pact) in 2024.
Finally, the EU executive projects that Spain’s public debt will continue to fall, but at a very slow pace, from 113.2% in 2022 to 110.6% this year and 109.1%. A decline that can only be explained by GDP growth and not by budgetary adjustments. This year, Spain will be the country with the third highest public debt in the entire EU, only surpassed by Greece and Italy.