Rafael Domenech participated this week in the capital of Gran Canaria in the I Regional Congress of Family Businesses, where he made an analysis of the economic situation in Spain and forecasts for the future. On the occasion of his participation in this forum, he gave an interview to CANARIAS7 where he analyzes the present and future of the tourism sector of the islands in an environment of great uncertainty.
– The OECD has lowered the economic forecasts for Spain in 2023 and improved those for this year. Will there also be a change for the Canary Islands?
– We see that the data for the third quarter were better than expected and this has a carry-over effect on the starting point of the growth of the fourth quarter of this year and of 2023. This improvement changes the upward bias of the forecasts although it does not change them substantially. We see that many international institutions are making forecasts like the ones we did a few months ago. Let's say they are converging. In any case, I think the main message, with all the uncertainties, is that the Spanish economy is holding up quite well and particularly the Canary Islands, which is growing faster than the State. It was one of the regions that suffered the most during the covid due to the weight of tourism and that was the sector most affected by mobility restrictions and now, the recovery, linked to the quasi-normality of tourism, is greater. For 2022 and 2023 the growth of the Canary Islands will be twice that of Spain, with 9% this year and 2% next. However, the level of per capita income in the Canary Islands will be reached later, by the year 2024.
– These good forecasts for the islands contrast with the recessionary situation in Germany and the change in fiscal policy in the United Kingdom, which will affect the middle classes above all and could mean a drop in tourist demand in these countries.
– It is a possibility but there is also one thing that the covid revealed. These crises have very heterogeneous effects, by sectors, by groups, by countries, by regions... For better or for worse, and it may be that there is a lot of substitution in tourism. It cannot be ruled out that the Canary Islands could benefit from a reorientation of tourism precisely because in times of uncertainty, be it health or energy prices, many tourists prefer to stay in the Canary Islands than go to other more distant destinations. We already saw it in the Mediterranean crisis, that, although the circumstances were different, the Canary Islands were one of the beneficiaries. Now the conditions are back for a reorientation of tourism. The islands offer better quality/price than other destinations without going into clichés such as the energy crisis may cause people to decide to live here rather than in northern Europe because it is cheaper.
– And in the medium and long term, with decarbonization and sustainability, what will happen to the Canary Islands destination? Because air traffic is one of the main emitters of polluting gases and is the object of this crusade.
– This situation forces airlines to apply new technologies with a lower carbon footprint or even zero. There are many working on the issue of biofuels and I think this is going to mean a period of accelerated technological improvements in some sectors, particularly air transport, but I don't think even the future of aviation is at stake, because we will be able to travel without contaminate, nor the tourist sector of the Canary Islands that has access to renewable energy. Here the Canary Islands have a comparative advantage over other destinations. Hence, the total net footprint, between transport and accommodation, will be less and this will play in favor of the Canary Islands.
«The Canary Islands will grow above average in 2023 but its per capita income will not recover until 2024»
– Some economists say that this crisis will not resemble the one of 2008 because it will not be as deep. What opinion do you have from BBVA Research? And how will this recession affect citizens?
– I start with the latter. This recession is influencing inflation and income capacity. Inflation hurts more and more people and what seems clear is that this time the unemployment rate will hardly increase compared to what happened during the Great Recession. That crisis affected unevenly. Many groups lost due to employment and in this, the loss is more distributed among the entire population due to inflation. It is always easier to recover from an inflation problem that is also imported.
– Nor will there be so many evictions then, especially now that the bank is going to sign an agreement to help the mortgaged.
– The unemployment rate is the variable that best explains evictions. To the extent that there is no significant deterioration in the labor market and at the same time, household deleveraging continues, the increase in the financial burden due to higher interest is offset by the decrease in the burden due to the amortization of principal, with which that the effect is practically neutral.
– What forecasts do you have for inflation in 2023?
– If the second-round effects that give rise to a spiral of prices, wages and margins can be avoided, we expect average inflation in 2023 to be 4%, slightly below half that of 2022. Data from the latest months suggest that there is an increasingly smaller percentage of goods and services in the CPI basket that rise above 10% and those that grow below 2% more. For their part, the leading indicators of core inflation also point to a decline in the coming months, if price risk scenarios do not materialize.
"We expect average inflation to be 4% next year, below half that of 2022"
– I don't know if you have already assessed the impact on the economy of the rise in the SMI because judging by the data it has not played against employment or the economy. Is there room for further increases?
– The increase in the interprofessional minimum wage (SMI) has benefits for workers who see their wages increase and maintain their employment, but also costs if they hinder the employment possibilities of workers with less qualification and productivity. Increases in the minimum wage are a symptom of healthy economic progress when they are the consequence of increases in productivity, but they become a problem if the growth of the SMI is much higher than that of productivity. In addition, the differences in the effects of an increase in the SMI in some regions and sectors can be very different from others, when in many of them the SMI has already exceeded 60% of the average salary. Unfortunately, the decisions to increase the SMI in recent years in Spain have been made without rigorous evaluations of their effects and without adopting compensatory measures to improve active policies in those groups that may have been harmed.
– How will the rise in interest rates affect the administrations and their high level of indebtedness?
– The rise in interest rates will gradually increase the average cost of public debt as it is refinanced. It will be a process that will take several years, given that good work has been done over the last decade to increase the average maturity (currently 8 years) of public debt with long-term financing. The challenge for Spain is to ensure a sustainable debt path through balanced and credible budgetary policies, so that the enormous advantage provided by the fiscal space of issuing debt with the lowest possible risk premiums can be taken advantage of.
– Do you fear that Europe could return to austerity or do you see that risk still distant?
– The so-called austerity policies are not the result of a political choice but of a necessity to be able to issue debt and finance public deficits when the markets begin to doubt the sustainability of public accounts, as has recently occurred in the United Kingdom. In any case, as far as Spain is concerned, there can be no talk of austerity since the Great Recession. If the forecasts for 2023 are met, GDP per capita will have increased by 3% in the last 15 years, since 2008, while current public spending in per capita terms has increased nine times, 27%. This divergence is unsustainable and the best way to avoid austerity situations is to carry out reforms that increase the growth potential of GDP per capita and maintain the sustainability of public accounts.
"In this recession, unemployment rates will not reach the levels of 2008"
– In your speech during the family business congress, you commented that one of the risks for the forecasts is that it tries to tackle the situation with counterproductive economic policies. Could you give me an example of a bad decision of this type?
– The new bank tax is a good example, as the European Central Bank and the International Monetary Fund have pointed out. There are no reasons to tax the banking sector (which does not obtain extraordinary profits) in a discriminatory manner compared to other productive sectors, its return on equity has been lower than that of the economy as a whole and of large companies for more than a decade, It is an arbitrary tax that does not even fall on profits but rather on income (although an entity may have losses), it will negatively affect credit, it will make banking services more expensive, it will hamper economic growth and generate uncertainty about the tax system. Spain has a more competitive and efficient banking system than other sectors of its economy, which allows households and companies to access financial services with added value in terms relative to their higher cost than their European competitors. This positive contribution of the banking sector to investment, progress and well-being of the Spanish economy is negatively affected by the new tax.
– You have recently written a book on prosperity, what does it take to achieve it?
– The evidence shows us that the economic progress and well-being of the most advanced societies rest on competitive economies, increasingly better human and technological capital, good public policies that provide stability, confidence and certainty, and encourage private investment, and some institutions economically efficient and socially inclusive, which ensure good rules, standards and regulations and better public services, provide legal certainty, reduce corruption, increase competition and open markets, and improve the economic environment.