BBVA cuts GDP by 2023 but maintains vigor this year

Pedestrians on a Bilbao street. / J. GERMANY

Consumption continues to show signs of weakness due to inflation that could close 2022 at 8%, according to the entity's study service

Jose Maria Waiter

BBVA's research service has also revised down its GDP growth forecasts for Spain for 2023, from 3.3% to 1.8%, although it maintains the outlook for 2022 at 4.1%. These new calculations, published this morning, are practically the same as those prepared by the European Commission for this year, although they differ by 0.3 tenths down for next year.

The reason for this deterioration is explained by the scarcity of some raw materials, the increase in their price and the recent transfer that has been observed of this increase in production costs to the entire shopping basket (Spanish inflation closed June at 10.2% year-on-year), as well as the expected rebound in the financial burden of companies and families as the European Central Bank (ECB) advances in the withdrawal of monetary stimuli, as indicated in the latest report 'Situation Spain' , presented by Jorge Sicilia, Director of BBVA Research and BBVA Chief Economist; Rafael Doménech, head of Economic Analysis; and Miguel Cardoso, chief economist for Spain.

The growth of the GDP of Spain has slowed down during the first six months of 2022 compared to the second half of 2021. The advance of the first quarter -when the Russian invasion of Ukraine began- was 0.2% quarterly and will be approximately 0.6% in the second quarter, considerably below the expected gains of 2.6% and 2.2% quarterly in the third and fourth quarters of last year, respectively.

BBVA Research highlights the drop in household consumption in this first part of the year. In any case, the slowdown in the central part of the year will be less than what was expected three months ago, which will partially offset some of the headwinds that can be seen after the summer. Additionally, disruptions in global value chains continue to limit the supply of certain goods such as cars, sales of which have fallen by up to 50% since 2019.

According to BBVA Research, household spending has been negatively affected by the increase in the price of raw materials and intermediate goods, and particularly fuel and electricity. In addition, the probability of a gas shortage scenario in Europe has increased, which has led to continuous revisions in the outlook for its cost.

The new upward revision in the price of gas could subtract between 0.1 and 0.2 additional percentage points from GDP growth in 2023. To this has been added, after a period of containment between 2020 and the end of 2021, a higher pass-through of the rise in production costs to final prices, as companies perceived that the increase in the cost of inputs would last longer than initially expected. Consequently, inflation continues to surprise on the upside, and is no longer limited to a few CPI components. The core, which includes 82% of the basket of goods and services of households, could rise even more and average almost 6% during the second half of the year.

On the other hand, households are not using the wealth accumulated during confinement to consume at the expected rate. The Ministry of Economy has always quantified the money saved by families after the coronavirus at around 50,000 million euros. But it is possible that the uncertainty about the evolution of the economy and the increase in inflation end up causing households to delay some decisions or even encourage investment in housing as a refuge.

BBVA Research experts also analyze the discrepancy between the Spanish GDP figure, which has still not recovered everything lost in the pandemic, and the strongly recovered employment figure. And he blames it on the low growth of productivity per worker. His analysis highlights that it may be a direct consequence of the higher job creation in certain services sector activities and the level of the unemployment rate, the lowest since September 2008. On the other hand, the effect of the reform employment, which has led to an increase in the percentage of discontinuous fixed contracts, may be maintaining job creation but with a lower intensity of hours worked.

Despite the downward revision of the expected GDP growth for 2023, BBVA Research economists maintain that for the time being the recovery is continuing and the inertia is positive for the third quarter of this year. They expect the slowdown in activity to be limited and short-lived, thanks to various factors. In the first place, the wealth accumulated during confinement could sustain consumption during the coming quarters despite the risks surrounding the economy and help soften the impact of several of the negative elements previously described, or be used for home purchases . Second, the execution of the Next Generation EU (NGEU) funds could accelerate during the coming quarters. Finally, the positive effects of the labor reform could help sustain the evolution of consumption, particularly among the youngest, in addition to favoring productivity.

Hiring data suggest that changes in regulation are reducing the weight of temporary employment, especially among those under 25 years of age. Greater job security could reduce precautionary savings among this type of worker or increase their willingness to borrow. In addition, a more stable employment relationship could increase the incentives to invest in the human capital of the people hired.

At the same time, BBVA Research forecasts that the variation in the CPI will remain high, reaching almost 8% on average during 2022 and 3% in 2023. More "worrying", indicates the report, may be the trend of the underlying, which could reach 5% on average this year and 4% the next.

If the ECB definitely raises rates, BBVA Research estimates point to a direct negative impact of seven and three tenths on Spain's economic growth in 2022 and 2023, respectively. In addition, the lower European demand will cut the advance of exports and, therefore, of the activity of the Spanish economy (-0.8 points for the whole biennium).

In any case, the report 'Situation Spain' indicates that the increase in interest rates finds the Spanish economy better prepared than in previous recessive periods. The debt of families and companies has been reduced sharply in recent years, and is currently at levels similar to those of the rest of the eurozone countries. Additionally, the private sector has accumulated assets that can help soften the impact of a higher financial burden. More vulnerable may be the situation of the public sector, with high debt thresholds.

The BBVA Research experts include in their report an initial assessment of the measures announced by the government in the last Debate on the State of the Nation, all of them presented as transitory. The temporary freeing of some public transport is a measure that will help alleviate the cost of inflation and reduce the demand for energy, and is more selective than the fuel subsidy. It seems like a missed opportunity not to have eliminated this support for the consumption of non-renewable energy and to use the resources to increase support for households, the self-employed and companies particularly affected by the increase in the price of gasoline and electricity. Regarding the announcement of sectoral taxes, BBVA Research considers that "it makes no sense to penalize specific sectors, such as the banking system", which does not generate negative externalities in the rest of the economy, but quite the opposite: it facilitates the allocation of productive resources to the most dynamic and fastest growing sectors.

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