The Bank of Spain will revise inflation upwards and cut its forecast for GDP in 2023

Warns that inflationary pressures are still very high and persistent, generating significant falls in real income

MADRID, 26 Sep. (EUROPA PRESS) -

The Governor of the Bank of Spain, Pablo Hernández de Cos, has anticipated this Monday that the body plans to revise downwards its estimates of economic growth in 2023 and upwards the inflation forecasts for the years 2022, 2023 and 2024, in line with those made for the euro area.

During his speech this Monday at the La Caixa Economy and Society Foundation Chair, the governor confirmed that the Bank of Spain will update its projections at the beginning of October. The last ones published in June anticipated a growth of the Gross Domestic Product (GDP) of 4.1% in 2022, 2.8% in 2023 and 2.6% in 2024. For its part, an inflation of 7.2% was projected in 2022, 2.6% in 2023 and 1.8% in 2024.

But, the latest forecasts from Consensus Forecasts, corresponding to the month of September, project growth in Spain of 4.3% for 2022, stable compared to June, and 1.6% in 2023 (compared to the 3% forecast in June). Regarding inflation, an average rate of 8.8% and 4.1% is projected in 2022 and 2023, respectively, 1.3 percentage points and 1.5 percentage points, respectively, above the June projections.

Specifically, Hernández de Cos has warned that a certain moderation in the dynamism of employment is perceived in the third quarter of the year, while the rest of the still "scarce" quantitative indicators available for this period, such as car registrations, the index retail trade or the industrial production index "tend to confirm the loss of momentum in activity".

In addition, the governor has recalled that the recovery in Spain after the impact of the pandemic is still incomplete, unlike the case of the euro area. This is attested to by the fact that a negative output gap still persists with respect to pre-pandemic levels (specifically, -2.2 percentage points), while that gap is already positive (1.8 points) in the eurozone.

During his speech, the governor warned that inflationary pressures are still very high and persistent, generating "significant falls in real income". "The magnitude of the increase in inflation is without recent precedent," he noted.

Specifically, in the euro area, the Harmonized Index of Consumer Prices (HICP) stood at 9.1% in August. In Spain, it has increased from slightly negative rates at the end of 2020 to 10.5% in August 2022. As a reference, to find a similar acceleration you have to go back to 1977.

And this despite the fact that the measures adopted in Spain to contain the rise in energy prices have reduced total inflation by 1.8 percentage points in that period, according to the Bank of Spain.

On its side, the agency has warned that the increase between December 2021 and August 2022 in the year-on-year rate of change in food prices has been 8.1 points. It has also generated a certain pass-through to other goods and services: it is estimated that an increase of 10 points in the prices of food raw materials ends up having an effect of four tenths on the general CPI after one year.

With all this scenario, Hernández de Cos has pointed out that the increase in compensation per employee in Spain stood at 4.8% in the second quarter, well below inflation. "The loss of purchasing power of households is very significant," explained the governor, who, on the side of business margins, has indicated that they show relative stability.

To deal with this phenomenon, the governor has defended the decisions in economic policy that the European Central Bank (ECB) is adopting with the rise in rates and has anticipated that ensuring the return of inflation to the target of 2% in the medium term " will require further increases in interest rates.

As he has warned, one of the elements of risk in this scenario is that related to possible second-round effects, which for now would not be taking place. For this reason, he has once again insisted on the need for social agents to reach an income pact.

In this framework, the distribution of costs should be agreed between the companies, which would have to accept a reduction in their unit margins, and the workers, whose purchasing power "could not remain intact", according to the governor.

The possible income pact should prevent the measures from being applied too generally and contemplate multi-year commitments regarding salary increases and the evolution of margins.

In this sense, he considers it "desirable" to avoid formulas for automatically indexing wages to past inflation or safeguard clauses, in order to reduce the risk of triggering feedback between wage increases and price increases.

As far as public spending is concerned, the Governor believes that the widespread use of automatic indexation clauses should be avoided, while at the European level he has advocated that the review of fiscal rules include their simplification through the establishment of a rule of growth of public spending, with an anchor in the ratio of debt to GDP, as well as enhancing the capacity to accumulate fiscal buffers in periods of economic boom to use them in times of crisis.

In the case of Spain, reinforcing the sustainability of public accounts requires adopting a medium-term strategy, starting from the immediate definition of a multi-year fiscal consolidation plan for its execution once the economic effects of the pandemic and the the war in Ukraine.

"This plan should have a broad political consensus, and be accompanied by a review of the efficiency of public spending and the tax system and incorporate all levels of Public Administration," the governor reiterated.

With the current scenario, the governor has warned that the tightening of financing conditions may increase the financial pressure borne by some companies and households. For Spain, it is estimated that, given the increase observed in market rates, the weight of financial expenses on the economic results before interest of the indebted medium-sized company would increase, in the short term, between 2.5 and 5.6 points , according to the percentage of debt and loans that are refinanced in the short term.

In the case of households, it is estimated that the proportion of families with debt that would have a high net financial burden would increase in Spain by almost 4 points.

Finally, the governor explained that, incorporating the current expectations of interest rate increases, the financial burden of public debt would increase in Spain from 2.2% of GDP at the end of 2021 to 2.6% in 2024 .