AIReF cuts its growth forecast for 2022 by one tenth, to 4.2%, and triggers inflation to 7.8%

It estimates that the Spanish economy will recover its pre-pandemic level in the third quarter of 2023

MADRID, 15 Jul. (EUROPA PRESS) -

The Independent Authority for Fiscal Responsibility (AIReF) has cut its growth forecast for the Spanish economy to 4.2% for this year, one tenth less than in its previous estimates in April (4.3%), and has raised the rate average inflation for the year as a whole from 6.5% to 7.8%.

This was announced by the president of the independent body, Cristina Herrero, during the presentation of the 'Report on Budget Execution, Public Debt and the 2022 Expenditure Rule of Public Administrations'.

The new AIReF macroeconomic forecasts, in line with those of other national and international organisations, place GDP growth just one tenth below the last scenario proposed by the Government (4.3%) in the Update of the Stability Program sent to Brussels.

"The good behavior of the services sector, and especially of tourism, is sustaining growth in 2022, with which there is only a slight revision", explained the president of AIReF, who foresees that the Spanish economy will recover the levels prior to the pandemic in the third quarter of 2023.

AIReF has warned that downside risks have intensified towards the end of the year and early 2023 in a context marked by the war in Ukraine and escalating inflation. Externally, Herrero has warned about the impact that a total cutoff of the Russian gas supply would have, with the possibility of a recession in the European Union.

At the national level, Herrero has focused on the evolution of private consumption, since there is a decrease in the purchasing power of households, in a context of less favorable financial conditions, with a decrease in savings generated by the pandemic, and a deterioration in family confidence. In addition, AIReF has reiterated the lack of information regarding the impact of the Recovery Plan, although it maintains its impact on the 2022 GDP level at 1.8 points.

INCREASES ITS FORECASTS ON THE DEFICIT DUE TO GOVERNMENT MEASURES

As for the fiscal scenario, AIReF has raised its deficit forecast for this year by three tenths to 4.5% of GDP, a level that is still below the forecast raised by the Executive in the Stability Program (5 %).

The extension of the measures to deal with the energy crisis, the review of the macro picture and the latest available information explain the change. Specifically, the extension of the measures to deal with the rise in energy prices and the effects of the war in Ukraine entail an increase in the deficit of six tenths of GDP.

For its part, the largest increase in nominal terms of the macroeconomic variables due to inflation implies an improvement in the balance in 2022 of 2 tenths. Finally, the incorporation of new information reduces the deficit forecast by one tenth due to a more positive evolution of collection, partially offset by an execution of expenses above what was previously forecast.

Revenue, not including the Recovery Plan, will reach 42.4% of GDP, one tenth higher than forecast in the previous report due to the revision of the macroeconomic scenario and the positive execution data, which compensate for the lower collection that the extension of the measures.

For its part, expenses, also without the Plan, will stand at 46.9% of GDP, 4 tenths above what was forecast in the previous report. The extension of the measures, including the fuel discount and the increase in defense spending, represent a higher spending of 4 tenths of GDP.

The deficit forecast for all subsectors worsens somewhat compared to May. The Central Administration assumes the cost of the extension of the measures, but also sees the revenue forecast increased, so the deficit forecast is increased by only one tenth, to 3.3% of GDP.

In the Social Security Funds, both the revenue and expenditure forecasts are slightly increased and the deficit is maintained at 0.5% of GDP. For its part, the balance forecast for the communities worsened to 0.9% of GDP due to a higher-than-expected execution of expenses and a lower forecast of income from European funds. Lastly, in local corporations the surplus forecast is slightly reduced, but remains at 0.2%.

ALMOST ALL THE COMMUNITIES WORSE THEIR CLOSURE FORECASTS FOR 2022

AIReF also published this Friday the individual reports of the autonomous communities that complete the pronouncement on the subsector and almost all worsen their closing forecasts for 2022 and up to 7 will close above the reference rate, 5 of them clearly.

At the opposite extreme, 5 communities maintain positive balances or very close to balance. Likewise, AIReF published the Complementary Report on the Individual Assessment of Local Entities, in which it estimates that 8 large Local Corporations will register a deficit in 2022.

In said report, AIReF maintains the sustainability risk rating of all entities with problems. The municipalities of Arroyomolinos and Lepe come out of the analysis and the situation of the municipalities of Alcorcón, Algeciras, Aranjuez, Gandía, Los Barrios, and San Andrés del Rabanedo improves. On the opposite side, the critical situation of Jaén and Parla is consolidated by generating negative balances and Barbate once again fails to comply with the duty of collaboration.

THE DEBT WILL CONTINUE TO FALL UNTIL 2025

In terms of sustainability, AIReF points out that the increase in public debt makes the sustainability of finances a "source of vulnerability", especially in a context of tightening financing conditions.

For the Administrations as a whole, a decrease in the debt-to-GDP ratio of 9.6 points is projected in the next four years, down to 108.8% in 2025. However, the ratio will return to an upward path in a scenario in which the structural balance is held constant.

AIReF performs various simulations in which it is shown that maintaining a structural primary deficit of between 1.5 and 2.5% of GDP from 2025 would place the debt ratio between 125 and 140% of GDP in 2040. "The higher expected interest rates contribute to aggravate the dynamics of the debt," the agency has warned.

RECOMMENDATIONS

In this context, AIReF deepens the need for a medium-term fiscal strategy with a view to the budget preparation process for 2023. Specifically, it reiterates the recommendation to design a national strategy that serves as fiscal guidance and realistically guarantees and credible financial sustainability of the Administrations.

In addition, taking into account that the benefits of said strategy are applicable individually to each administration, AIReF issues a new recommendation addressed to the Ministry of Finance and Public Function and to each autonomous community on the need to frame the preparation of the budgets for 2023 within a medium-term fiscal strategy.