Bank of Spain raises its GDP forecast in 2024 by three tenths, to 1.9%, and improves inflation to 2.7%

Deficit forecast worsens to 3.

Bank of Spain raises its GDP forecast in 2024 by three tenths, to 1.9%, and improves inflation to 2.7%

Deficit forecast worsens to 3.5% this year and warns that European fiscal rules will require spending adjustments


The Bank of Spain has raised its forecast for growth of the Spanish Gross Domestic Product (GDP) by three tenths from 1.6% to 1.9% and has maintained its estimates for 2025 and 2026 at 1.9% and 1. 7%, respectively.

The general director of Economy and Statistics of the Bank of Spain, Ángel Gavilán, explained in the presentation of the quarterly report that in the coming years private consumption and investment will be the main drivers of Spanish economic activity.

But, in the short term, the main factors behind the Bank of Spain's revision of the average GDP growth rate this year to 1.9%, approaching the Government's estimate (2%), are the improvement of National Accounts data relating to recent quarters.

In addition, the lower energy prices that have been observed in recent months, more favorable perspectives regarding their future evolution and the partial extension of some of the measures deployed by the Government to combat the effects of the crisis would be behind this review. inflationary episode.

However, the organization led by Pablo Hernández de Cos has warned that the composition of the growth observed at the end of 2023 suggests some elements of weakness (gross fixed capital formation and private consumption), while the most recent conjunctural indicators suggest that the pace of GDP growth would have slowed slightly in the first quarter of this year, to 0.4%.

On the price side, the Bank of Spain's forecasts are more favorable. Specifically, it revises the average general inflation projected for 2024 downward by six tenths, to 2.7%. In addition, it has lowered the inflation forecast in 2025 by one tenth, to 1.9%, and that for 2026 by two tenths, to 1.7%.

The organization also predicts that core inflation will gradually slow down over the next three years, from an average rate of 2.2% in 2024, 1.9% in 2025 and 1.8% in 2026.

Regarding food prices, the Bank of Spain estimates that their moderation will continue throughout the projection horizon, given the decrease in the costs of several of its most important productive inputs - such as energy and fertilizers -.

On the other hand, it considers that the extension of the VAT reduction on food until June 2024 will help contain food prices in the first half of the year, although it will put slight upward pressure on them in the second half.

In its new projections, the Bank of Spain worsens its estimates on the deficit for 2024 and places it at 3.5%, one tenth more than the previous projection and half a point above the Government's projections (3%). .

For 2025 and 2026, the organization cuts the deficit projection for both years by one tenth, to 3.5%, which would leave Spain in non-compliance with the fiscal rules set by Brussels.

Regarding the debt forecasts over GDP, the Bank of Spain's estimates point towards an upward path between 2024 and 2026, despite the moderation observed in recent years since the peak caused by the pandemic.

Specifically, for 2024 the projections are 106.5%, worse than the previous 106.3%; 107.2% in 2025 (same as the previous forecast) and 108.4% in 2026 (also identical to the previous estimate).

Regarding the labor market, the Bank of Spain expects that the dynamism of employment will moderate throughout the projection horizon, so that there will be a certain recovery in productivity.

The agency has revised upwards its estimates for employment growth in 2024 from 1.3% to 1.8%, although the slowdown path projected for 2025 and 2026 remains unchanged, when it will advance by 1.1%. and 0.9%, respectively.

Thus, and despite the upward revision of GDP, apparent labor productivity will continue to show considerable weakness during 2024, although it is expected to register some recovery throughout the rest of the projection horizon.

For its part, the unemployment rate will continue to reduce in the coming years, although at a slower pace than in previous years. Specifically, the organization estimates a rate of 11.6% in 2024, one tenth below the previous forecast, 11.5% in 2025 and 11.3% in 2026.

In addition to the uncertainty arising from geopolitical tensions and the quantification of the macroeconomic impact of the accumulated tightening of monetary policy, it is worth highlighting, at the national level, the risks that the reactivation of fiscal rules poses for the central scenario of the current projections. at European level.

In particular, compliance with these rules will require the design and implementation of a medium-term fiscal consolidation plan that allows for a more pronounced correction of the structural public deficit than that contemplated in these projections.

Although the economic impact of said adjustment plan is uncertain - and will depend critically on how it is designed - its implementation would predictably entail a lower degree of dynamism in activity throughout the forecast horizon.

Other significant sources of uncertainty about the central scenario of these projections, according to the Bank of Spain, have to do with possible second-round effects on inflation and the deployment of the 'Next Generation EU' funds.

On the one hand, the organization has warned that a greater increase in wages or business margins than anticipated would imply a higher inflation path than that contemplated in the central scenario of these projections.

And the fact is that, although the rate of moderation of inflation and the evolution of margins and salaries that are being observed at the moment do not point in that direction, the possibility that processes of inflation may occur in the future cannot be completely ruled out. more intense feedback, especially in a context in which the dynamism of remuneration per employee is being greater than that corresponding to the salaries agreed in the agreement and the labor market is showing a notable degree of tension.

In this sense, the Bank of Spain has warned that the fact that, in recent months, the path of moderation of underlying inflation in Spain has been somewhat less pronounced than anticipated forces us to be "cautious" before giving by subduing the current inflationary episode.

On the other hand, the organization has warned that doubts remain regarding the pace of execution of the projects associated with the 'Next Generation EU' program and its impact on activity. In this sense, in recent quarters investment has surprised downwards in Spain. "If this weakness were to last longer than expected, this would put downward pressure on activity and inflation throughout the projection horizon," the report warns.