The economy of the euro zone, including Spain, will have to face extremely difficult months. The outlook for GDP and inflation have been worsening month by month. What at first seemed like it was going to be a slowdown in the economy, together with high inflation, now points to a deep recession, longer than expected and with “undesirably high” prices.
Deutsche Bank has just reflected this scenario in new forecasts that anticipate what it forecast only a month and a half ago. The recession will reach practically all points in the euro zone and will last until the end of 2023.
The worst part is taken by Germany. “Germany is the country most exposed to gas supply restriction and we cut our 2023 GDP forecast from -1% to a 3-4% drop. We also revised the Eurozone GDP forecast from -0 .3% to -2.2%”, according to the new forecasts published this Wednesday.
Deutsche Bank revises its forecasts for the Eurozone and Spain very downwards
Skyrocketing energy prices are making operations extremely expensive for thousands of companies that for years have maintained their competitiveness thanks to cheap energy, controlled labor costs and investment in technology. Now, German and European industry seem to have lost every pillar that had made the bloc the region with the largest current account surplus in the world. Moreover, the latest data released by the European Central Bank reveals that the Eurozone is running trade deficits. The Eurozone is importing much more than it exports. One of the engines of the European economy is totally seized.
“The situation has deteriorated much and fast”
“In mid-July we had updated our growth forecasts for the euro area anticipating a mild recession in mid-winter due to the reduction in gas supply from Russia through Nord Stream 1 (NS1).”, the economists say. of DB.
“We now forecast a longer and deeper recession than in July, with euro area real GDP falling close to 3% in aggregate between the second quarter of 2022 and the second quarter of 2023. Such a fall, going from the The peak to the valley will be 50% higher than that observed during the euro crisis, but approximately half of that observed during the Great Recession”, state the experts at the German bank.
From Deutsche Bank they also point out that “there are factors that could generate more disadvantages: a colder winter than expected or a greater amplification of the competitiveness shock. Our expectations of general inflation measured by the CPI in the euro zone in 2022 and 2023 they have fallen a few tenths to 8.2% and 6.2% respectively, mainly due to the decline in oil prices… Despite a deeper recession, we maintain our forecast for the ECB’s final deposit rate of 2 ,5%”.
These experts believe that if the recession drags down employment and inflation expectations more than expected, the ECB’s hike could stop at 2%. Rate hikes could also create certain risks for the most vulnerable and indebted economies, such as Italy, where debt to GDP exceeds 150%. “The recession and the rise in rates may test Italian stability…however, as long as member states continue to comply with the EU’s fiscal and economic rules, the market will.”
Spain will enter a recession
Germany and Italy are among the most affected countries, while Spain, Portugal or France will better withstand the crisis due to their lower dependence on Russia for energy. The Spanish economy should grow around 4% this year, driven by the recovery of tourism and the help of European funds. In addition, although Spain is one of the countries most vulnerable to rate hikes (high debt and ), this 2022 could still hold the rate well, since net debt issues will not be excessively important.
However, in 2023 the situation could be a bit more dangerous. DB economists expect Spain’s real GDP to contract by 1.% y/y in 2023 and rebound by 1.9% y/y in 2024. On a quarterly basis, our projections anticipate -0.4% qoq in the fourth quarter of 2022 (4Q-2022), a sharp drop of -1% qoq in 1Q-2023 and -0.4% qoq in Q2-2023. Activity is expected to broadly stabilize in the summer of 2023 and start to pick up in the fourth quarter of 2023 to 0.6% qoq and remain at this high quarterly growth rate throughout 2024.
“Overall, Spain is relatively less exposed to the energy and gas shock. The ‘Iberian exception’ granted to Spain and Portugal in the spring of this year to relieve pressure on household electricity prices is a reflection of that reality. Despite this, we expect Spain to be severely affected this winter by the recession. Spanish households are relatively more exposed to the tightening of monetary policy by the ECB,” DB experts warn.
The smaller fiscal space in Spain, together with the great inflationary shock, will reduce the real disposable income of households, “severely dragging down consumption”. Unlike previous ‘macro’ shocks (the financial crisis, the euro crisis and covid), public investment should materially support total investment in the economy,” the report states.
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