The Bank of Spain has revised down forecasts marked by the war in Ukraine and inflation. The monetary institute for the economy in 2022 by almost one point, up to 4.5% compared to the 5.4% estimated in the projection presented in December 2021. The big change occurs in the inflation forecast, which increases by almost four points: the BdE expects the average CPI in 2022 to be 7.5%, compared to 3.7% in previous forecasts.
That inflation doubles the expected figure in December (7.5 in these new projections compared to the average 3.7% expected in December) has to do with already before the war, since the second half of 2021. In particular, the context of high inflation at a global level was also being reflected in expectations of a and, consequently, in a moderate tightening of the financing conditions of the private sector.
The context of global price tension aggravates the situation in Spain, which is also dragging the upward trend in inflation in the euro countries. In part, says the Bank of Spain, the peak of 9.8% reached in March “would be directly reflecting the impact of the war, by way of higher energy prices. But it would also be the outdated result of the acceleration dynamics of prices of the preceding months and other factors that are indirectly related to the war, such as the shortage of some products caused by the strike in road freight transport”.
war feeds inflation
Thus, the consequences of the war have fueled the strong inflationary tensions that the Spanish economy was carrying, and energy prices will continue to press until they reach their peak in the second half of the year. The upward path drawn by the central bank explains that “the persistence of the alterations in the supply chains and the transmission of past increases in costs, which has intensified recently, will cause (and, with them, the general indicator) to rebound something more in the two central quarters of the year”. In other words, the high levels of inflation will remain until the third quarter of the year before moderating.
The path of the underlying rate, which excludes the volatility of energy and unprocessed food, would be below the average 3% this year, although it also grows one point from the December projections, although the upward revision is more contained. In the short term, this index is the most enlightening on general inflation, which “tends to converge”, as Gregorio Izquierdo has explained to this medium on several occasions.
By 2023 the general rate would moderate to the European Central Bank (ECB) target of 2%, and by 2024 it would be placed at 1.6%. Inflation would remain at 1.8% and 1.7% for the next two years, says the Bank of Spain.
However, another cause derived from the war raised by the BdE is a closure of trade with Russia. In the worst scenario of low replacement capacity, this energy breakdown would add 1.5 points to the CPI and subtract more than 1.2% from GDP growth compared to the central scenario in 2022. “The capacity of the EU countries substituting these energy inputs from Russia is limited and costly in the short term, which would give rise to potentially severe effects on GDP and inflation, also in Spain despite its lesser dependence on these imports”, supports the BdE .
Another scenario speaks of the feared second-round effects (the impact of inflation on the entire basket and wages). , the GDP could be reduced in the 2022-2024 period by around 1.5 points compared to its current projections, while around 3 additional points would have to be added to the expected harmonized inflation in these three years as a whole. “The prolongation of the inflationary episode also increases the probability that companies transfer the costs of
less growth
Russia’s invasion of Ukraine has notably modified growth forecasts, giving rise to a slower recovery scenario. Not only will real activity grow more slowly than expected in 2022, next year (2023) GDP will advance by 2.9% compared to the 3.9% predicted in the December 2021 forecasts.
For the first quarter of 2021, a timid quarterly growth of only 0.9% is expected. Uncertainty and rising prices are greatly slowing down the recovery of the economy. In the fourth quarter of 2021, activity increased by 2.2% and in the third by 2.6% quarter-on-quarter.
With these data, the Bank of Spain calculates that the economy will not recover the real GDP levels prior to the pandemic until the beginning of 2024. Precisely that year is the only one in which the BdE has revised its growth upwards to 2.5 %, compared to 1.8% of the previous projection. Thus, what was initially going to be a rapid and vigorous recovery (V-shaped recovery) is turning into a years-long recovery with growth spread over several years.
The outbreaks of covid-19 and the mutations of the virus have prevented the recovery of the economy from showing a linear trend. The activity has experienced a kind of roller coaster that has bungled the recovery. Now that the epidemiological situation is almost definitively improving, the conflict in Ukraine is weighing down the economy through the confidence of agents (which directly affects consumption and investment), the rise in the price of raw materials (reducing purchasing power families and company margins) and the commercial channel (which in turn generates scarcity and higher prices).
On the other hand, the BdE has notably improved the labor market forecasts: the unemployment rate is expected to fall to 13.5% (annual average) in 2022 compared to the 14.2% expected in December. However, working hours will grow at a lower rate (1.9% per year compared to 3.8%) than expected, so there will be a ‘distribution’ of employment rather than a real increase.
crash plan
and the energy crisis that the Government presented on March 29 in the Council of Ministers to counteract inflationary pressures will have a limited impact on prices in the short term and unpredictable consequences on public accounts and long-term incentives.
The battery of measures involves a reduction in the cost of various energy sources and the setting of limits on the revaluation of housing rentals. However, according to the estimates made by the institution, at the average inflation rate of 2022, as anticipated by this medium. On the other hand, these measures can reduce the incentives generated by supply prices and prolong the rebalancing of the market, both for rent and for energy.
The Bank of Spain, in turn, criticizes the lack of a fiscal consolidation plan. The deficit of the Public Administrations (AAPP) will continue to be very high in 2024, at 4.7% of GDP, more than 1% above what was projected last December. As a result of the trajectories projected for the general government balance and for nominal GDP, the public debt ratio would present a modest decrease, so that in 2024 it would stand at 113.5% of GDP, 6.5 points below from the maximum level reached in 2020 and 18 points above the level at the end of 2019.
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