The Bank of Spain ignores the limit of 30 euros on gas in its forecast reduction for the war in Ukraine

The Bank of Spain ignores the limit of 30 euros on gas in its forecast reduction for the war in Ukraine

macroeconomic forecasts that this Tuesday presented the Bank of Spain They will be a dead letter in the coming weeks if the European Commission approves the limit of 30 euros per megawatt hour for gas for electricity generation plants that use this raw material, the so-called "Iberian exception" proposed by Spain and Portugal.

A measure that would lower "half the electric bill", as explained by the Third Vice President and Minister of Ecological Transition, Teresa Ribera, in an interview with An estimate that the economic vice president, Nadia Calviño, also endorsed this Tuesday at the press conference after the Council of Ministers.

The institution lowered nine tenths the projection of GDP growth for 2022 and another percentage point for 2023, up to 4.5% and 2.9%, respectively, due to the impact of the war, and mainly due to the rise in energy prices that it has caused in recent months.

An increase that has already filtered into the entire shopping basket. The general CPI (Consumer Price Index) accelerated to 9.8% in March and the Bank of Spain itself expects it to average 7.5% this year. In this indicator, the spectacular increase in electricity prices has a key weight, for which the INE only takes into account in its methodology the domestic contracts that are covered by the voluntary price for small consumers (PVPC). These contracts are the most exposed to increases in the wholesale market and would immediately pick up the drop that the aforementioned Iberian solution would bring about.

The estimate of the Bank of Spain includes a positive impact of two tenths on the growth of economic activity and up to eight tenths of a reduction in inflation with the fiscal measures approved by the Government in the shock plan: fuel discounts, extensions of tax reductions on electricity or limit to the updating of rents.

However, do not appreciate the gas capwhich is pending approval from Brussels, not even in alternative assumptions to the central scenario (see graph).

The Bank of Spain report that includes the projections does recognize that "this measure could lead to a sharp reduction in wholesale electricity prices and, consequently, have a significant impact on the prices paid by consumers."

After knowing the proposal, different experts agreed that, if the European Commission approves limiting the price of gas by 30 euros to lower electricity, it will have "a very significant and automatic impact" on the rise of the CPI.

"However, given that the way in which this measure will finally materialize is unknown, no impact associated with it has been included in the projections," concludes the Bank of Spain.

The organization has considered alternative perspectives to the central scenario for growth and inflation according to extreme assumptions, such as "a closure of all bilateral trade flows between Russia and the European Union (EU), including those related to energy raw materials" .

In this hypothetical consequence of the invasion of Ukraine and of European sanctions on Russiathe Spanish institution builds three predictions: one according to "low substitution capacity", another "medium" and the last "high", which would imply an advance of up to 1.5 points more than general inflation in 2022 –from 7, 5% of the central scenario to 9%– and a reduction of up to 1.3 integers more pronounced for GDP growth –from 4.5% to stay close to 3%–.

"And it would be the most limited impact in the eurozone of this scenario, because here the least direct relationship between Spain and Russia does count," said Ángel Gavilán, director general of Economy and Statistics of the Bank of Spain in the presentation of the projections.

This advantage does not prevent the current rise in the prices of oil, gas and other raw materials in international markets due to the effect of the same war in Ukraine from being a greater blow to our country than to the rest of the large economies of the EU.

The blow is also greater for the purchasing power of Spanish households compared to the European average. The Bank of Spain admits that workers are losing "a lot of purchasing power", which is causing a consumption of the savings bag accumulated during the pandemic, which is estimated at 85,000 million euros and which it expects to decrease by a third in 2022 as a consequence of generalized price increases.

Returning precisely to inflation, beyond the general CPI, and going to the core shopping basket, which excludes energy and food as they are considered the most volatile elements, the institution projects that it will remain at 2.8%. Of course, he warns that in this basket without electricity, gas or gasoline, which are skyrocketing, 60% of goods and services already exceed a rate of increase of more than 2%.

In another alternative simulation to the central scenario of the projections, the Bank of Spain considers that if households consumed two thirds of that savings, and not just one, in response to the increase in the cost of living, GDP growth would accelerate 0.4 points percentage.

"The resulting increase in consumption would generate an increase in GDP and employment levels of four tenths in 2022 and an additional two tenths between 2023 and 2024," the report states.

The Bank of Spain warns that, given the current rise in prices, "the purchasing power of lower-income households will suffer, for which spending on energy goods represents a higher proportion of the total."

"In addition, the savings rates of these households are usually comparatively lower and the proportion of those who have been able to accumulate extraordinary savings during the pandemic is more limited, so they have less margin to cushion the effect of the increase in the energy bill without adjust their consumption of other goods and services downwards," he adds.

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