less growth and more inflation

The Bank of Spain now anticipates an economic scenario for 2024 that is much more gloomy than it had predicted in June. The new projections published this Tuesday by the Bank of Spain include less growth and more inflation by 2024. Specifically, the organization reduction from 2.2% to 1.8% the growth forecast for next year (four tenths less) and rises from the initial 3.6% to 4.3% the estimated average inflation for 2024 (seven tenths more).

The organization lowers the 2024 growth by four tenths, to 1.8%, and raises the expected inflation by seven tenths, to 4.3%

In its quarterly report, the Bank of Spain justifies the worsening of its outlook due to the rising oil prices and for the foreseeable withdrawal at the end of 2023 of the relief measures against inflation (reduction in VAT on food and energy products and bonus on public transport, among others). The new projections of the Bank of Spain also take into account the effects of interest rates that, predictably, will remain high for a long time. longer period of time than expected in June. Furthermore, when assessing the positive impact of tourism For the growth of Spanish GDP, the Bank of Spain is aware that, after the strong growth of this activity in 2022 and 2023, only a moderation in the growth rates can be expected.

Under the new assumptions, the Bank of Spain estimates that Spanish GDP will grow at rates of 2.3%, 1.8% and 2.0% in 2023, 2024 and 2025, respectively. Compared to the projections published in June, the current ones maintain the expected growth rate for 2023 unchanged (the OECD has also placed its forecast for 2023 at 2.3%), as a result of new upward and downward factors that they compensate each other. However, the growth rates in 2024 and 2025 are revised downwards by 0.4 and 0.1 percentage points, respectively.

The rise in oil prices and the foreseeable withdrawal of anti-inflation measures at the end of 2023 complicate the outlook for 2024

At the moment, the Bank of Spain detects signs of weakening in the Spanish economy in the summer months and anticipates, after growing 0.4% in the second quarter, it will only advance 0.3% in the third.

The general worsening of growth forecasts “is due, above all, to the new assumptions on which the projections rest, which imply an increase in the price of energy, a deterioration of the external context and a greater tension in financial conditions”, is explained in the quarterly report. Thus, for example, the new forecasts are based on a price of a barrel of oil around 83.5 euros in 2024 and 2025, up to 11 euros more expensive than the hypothesis that had been adopted in June.

All in all, a better performance of the Spanish economy is expected, with rates above those planned by the ECB for the euro zone (0.7%, 1% and 1.5% for 2023, 2024 and 2025 respectively).

On the other hand, compared to June projections, the rate of average general inflation (measured by the harmonized CPI, HICP) is revised upwards by 0.4 points for 2023 (up to 3.6%) and by 0.7 points for 2024 (up to 4.3%). By 2025, the forecast of HICP They remain at the 1.8% annual average.

For 2023, the upward revision is mainly due to the rebound experienced by oil prices during the summer. For its part, for 2024, the upward revision responds, above all, to the rising energy prices according to the futures markets, but also, to a lesser extent, to the effects on inflation implied by the possible elimination from January 2024 of the current VAT reduction on food and of the public transport subsidy.

The Bank of Spain anticipates that the foreseeable withdrawal at the end of 2023 of the measures to mitigate the effects of the energy crisis will cause high inflation rates in energy prices in the first quarters of 2024, “until reaching rates close to 25% in the spring“.

For the foodFor its part, inflation with a downward profile is anticipated in the coming quarters, although adverse weather conditions and the Russian veto on grain exports through the Black Sea add uncertainty.

Employment slowdown

After the high dynamism shown in the first part of the year, the Bank of Spain detects a slowdown in job creation in the third quarter. It now predicts that employment, measured in terms of hours worked, it will only grow 1.3% this year and 1.5% next year (instead of the 1.7% and 1.8% advanced in June). “The number of hours worked per person will be maintained at the end of the projection horizon below its 2019 level, as a reflection of the historically decreasing trend of this variable”, it is explained in the quarterly bulletin.

However, the supervisory body reduces the unemployment rate planned for this year (up to 12% of the active population) and maintains those for 2024 and 2025 at 11.5% and 11.3%.

Despite the increase in salaries, the Bank of Spain does not perceive a high risk of second round effects about prices. He salary increase agreed for 2023 stands at 3.4%, after 2.9% last year. Notwithstanding the new signature agreements agreed in 2023, which already affect almost 2.5 million workers, include an increase of 4.3%. In the private sector, salary increases of 6.3% were agreed in the first quarter and 4.6% in the second.

The strength of public income during the first half of the year leads the Bank of Spain to improve the public administration deficit planned for 2023, up to 3.7% of GDP. For 2024, the forecast of a deficit of 3.4% is maintained and for 2025 it worsens by one tenth, to 4.1%.

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