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The Bank of Spain Lowers Next Year’s Growth by Two Tenths to 1.6%

The agency considers that consumption will be the engine of the economy in 2024, foresees a drop in inflation and alerts on growth based on population growth and not on productivity

A tenth above or below in economic projections is not a very significant amount. This Tuesday on Bank of SpainIt has improved its growth forecast for this year by one tenth to 2.4%. It justifies it by the upward revisions made by the National Statistics Institute ( NSAID ) and which have greatly improved the progress of the economy, to the point of placing the recovery from the pandemic six months before, in the third quarter of 2022. And for next year the supervisory body reduces growth by two tenths, to 1.6%. The advance that the economy will have in 2024 will actually be similar or even slightly higher than that experienced during the second half of this year, but as such strong growth was registered during the first half of 2023, further reinforced by the INE review, the pace slowed significantly in the annual comparison.

Although private consumption will be the main engine of the economy, benefited by lower inflation and the recovery of real incomes, it will lose some steam, partly because next year will be the one with the greatest impact on rate increases and because a reduction in consumer credit is anticipated, which has been pulling despite the contraction of the rest of the loans. In this way, the vigor exhibited in the third quarter would be moderated a little, when it was possible to recover the level of purchases prior to the pandemic. The bank observes that the confidence that consumers have been showing lately to make big purchases is beginning to be stopped. Even so, the agency foresees a solid increase in household consumption of 2.3% for next year. And the investment will rise supported by European funds,whose impact is being delayed and its greatest effect is now expected to occur from 2024.

On the other hand, foreign demand will subtract some growth. Although not as much as it has been during the spring and summer of this year. Despite the bank waiting for exports to draw a slight recovery as activity in Europe gradually rebounds, imports will increase due to increased investment, more intensive in purchases from abroad, and due to the advance of national consumption. In addition, tourism sales will no longer propel exports with the same force: the bank expects them to slow down after having recovered the pre-cooked levels. In any case, Spanish exports of goods have behaved much better than those of the rest of Europe.And the fall in energy costs and the good performance of exports of non-tourist services will help to comfortably endure the surplus with the exterior.

Population growth

The supervisor anticipates that employment will moderate its dynamism by somewhat improving productivity. And remember that a good part of the momentum observed is attributed to the high incorporation of foreign workers. In fact, 40% of the employment created in the last year corresponded to foreigners. And, consequently, the unemployment rate will hardly drop in the coming years. It stands at 12% on average this year, but until 2026 it will only drop very slightly, to 11%, below the 16% recorded in the average of the last 40 years, but higher than the 8% that occurred in 2008. “ We are growing because the population increases and not because there are significant improvements in productivity ”, warned the director of Economics of the Bank of Spain, Ángel Gavilán.

Decreasing performance

Regarding the reform of the unemployment subsidy, the Bank of Spain considers that there is room to improve it both in the percentage of beneficiaries compared to the total number of unemployed, as in the associated training and in the requirements that are demanded of the unemployed. According to OECD studies, recalls the bank, Spain and Greece are the countries that, having higher unemployment rates, demand less from the unemployed when it comes to training, accept a job offer or control job search. “ We should try to bring the unemployment rate not below 10% but to that of our European peers ”, said Gavilan. The bank’s studies conclude that a decreasing benefit, without modifying the total amount given in the period as a whole, would help to return to the labor market earlier.

Loss of competitiveness

Wages are exhibiting moderate growth, which helps to recover real incomes and consumption as inflation loses strength. The average increase agreed in the agreements for 2023 is 3.5%, although those of new firm, which already affect 3.5 million workers, reach 4.1%. And the remuneration per employee collected by the INE shows an even greater increase, of 4.9% in a context of an increase in uncovered vacancies. Despite this relatively contained advance in wages, unit wage costs are gaining more weight from rising prices and low productivity. And they do it above what is seen in the rest of the countries of the euro zone since the beginning of the pandemic, especially after the review of the INE:“ It could end up affecting the competitiveness by price of Spanish companies ”, warns the Bank of Spain. Following the robust rebound in 2022, business margins are moderating.

Between July and September, the economy grew 0.3% quarterly, which represented a slowdown compared to the growth of the first half of the year. Even so, it is a much better record than that of the euro zone, at 0.1%. The bank explains this difference due to the greater vigor exhibited in private consumption and the better evolution of Spanish exports despite its slowdown. The entity expects that in the fourth quarter the activity in Spain will expand another 0.3%, according to the business surveys and the affiliation data.

Inflation moderates

The inflation rate surprises with its good performance and will help the growth of consumption next year. It is corrected above all by energy despite the persistence of services. In fact, internal factors such as wages and margins already gain weight in its evolution compared to what happened before, when it was mainly imported. This year the inflation of Spain comparable to Europe will end at 3.4%, two tenths less than what was predicted in September. For the next one it will be placed at 3.3%, largely due to the recovery of the energy taxes that had been reduced. Although the extension of the VAT reduction on basic foods and transport aid will make it not rise as much as expected. Already by 2025 the evolution of prices will be in the target of 2% of the ECB.

By contrast, the outer environment is not helping. European weakness is being greater than expected due to the sluggishness of foreign markets, the erosion of purchasing power, the tightening of financial conditions and the loss of competitiveness. This last factor will limit the improvement of the European foreign sector as the global economy improves due to the loss of market share. The euro zone is losing one of its traditional fortresses. And China or the United States are not expected to rebound appreciably in 2024 to further boost European sales.

Less vigor of public revenue

The public deficit will close the year at 3.8% of GDP, according to the bank’s estimate, one tenth below the government’s target. However, for next year the gap in public accounts will be 3.4%. It will only drop by four tenths and will stay a little far from the 3% that the Executive intends to achieve. Next year the European fiscal rules will be in force again and the 3% deficit is the barrier from which the budgetary discipline is applied. This forecast implies that the Government would have to remove all energy aid by 2024 and that it will probably have to tackle a new round of adjustment measures. If, on the contrary, the tax cuts in electricity and gas are extended, the cost would amount to 3,000 million euros and the GDP would grow two tenths more,according to the supervisor’s calculations. While during the recovery from the pandemic tax collection progressed at a rate far above GDP, now the opposite is true, although without so much force: revenues in 2023 are already below what would determine the economy and the measures adopted, the agency concludes.

Source: El Pais