Households that cannot cover essential expenses due to inflation and interest rate rises are growing, according to the Bank of Spain

The economic situation of households has generally improved and companies have mostly recovered pre-covid returns.

Households that cannot cover essential expenses due to inflation and interest rate rises are growing, according to the Bank of Spain

The economic situation of households has generally improved and companies have mostly recovered pre-covid returns


9% of households could not cover essential expenses with their total gross income in 2022, compared to 7% in 2020, given the observed growth in inflation and interest rates, according to the report published by the Bank of Spain on the financial situation of households and companies with respect to the first half of 2023.

High inflation and the tightening of the monetary policy of the European Central Bank (ECB) are having, in recent quarters, an adverse impact on the financial situation of households, warns the organization led by Pablo Hernández de Cos.

Despite the fact that the nominal gross disposable income of households was 6.8% higher in 2022 than in 2020, inflation has caused a cumulative loss of purchasing power of 4.5% in that period, which has limited the saving and spending capacity of Spanish families.

The results presented point to the greater vulnerability of households with lower incomes to the inflationary scenario and higher interest rates, for which reason the Bank of Spain recommends the introduction of economic policy measures focused on supporting this group.

However, the agency points out that the aid deployed in the form of income transfers to low-income households, the specific increase in non-contributory pensions, the introduction of the minimum vital income, or the reform of the code of good practices would have contributed, among other measures, to cushion some of the effects appreciated in his report.

In addition, the financing costs of households and companies have continued to rise across the board, a reflection of the change in tone of the European Central Bank's monetary policy and the supply of bank credit is becoming more restrictive.

According to the banks, the contraction in the supply of credit could be explained mainly by the increase in perceived risks, associated with the deterioration of the macroeconomic outlook, as well as by their lower tolerance for them.

"The increase in difficulties in accessing credit would have especially affected lower-income families and, in the case of companies, smaller ones, those recently constituted and those with greater financial vulnerabilities," the document states. report.

Although the economic situation of households has improved, with a gradual recovery of the purchasing power lost since 2021 as a result of high inflation, the adverse effect of the rise in interest rates on the disposable income of debtors has intensified and low-income households.

For its part, the household savings rate has abandoned the downward trend observed after reaching historically high levels during the pandemic. The recent rise in the rate would have been driven by the improvement in the purchasing power of families, as well as by the contraction in consumption. In fact, in the first quarter of 2023 they would be at levels above their historical average.

In any case, the Bank of Spain explains that the behavior of the savings rate in recent years has been compatible with the accumulation of liquid assets by households. Since the end of 2022, there has been a recomposition of these assets from cash and demand deposits towards instruments with a higher expected return, such as treasury bills, time deposits and funds.

Households have strengthened their wealth position at the aggregate level since the end of 2022, although the most vulnerable segments would have experienced a greater deterioration in their ability to repay debt or meet other expenses.

Thus, the information for the fourth quarter of 2022 shows an increase in gross wealth in real terms, after the falls of the previous quarters thanks to the moderation of inflation.

In this context, some signs of deterioration in the credit quality of loans granted to households can be detected. Doubtful loans to households continued to fall in recent quarters, with a year-on-year drop of 22.5% in March. The setback is widespread by category (housing, consumption and individual entrepreneurs).

However, loans under special surveillance have rebounded since the end of last year, with growth of 18% year-on-year in March 2023. The increase affected both credit for house purchase and, to a greater extent, consumer credit. On the other hand, credit to individual entrepreneurs continued to see falls.

The economic situation of companies has continued to show, overall, a favorable evolution, although with some heterogeneity by sector. Thus, according to the Quarterly Balance Sheet, in the first quarter of 2023 business surpluses increased, driven by the advance in economic activity and, in some cases, by the recovery of margins on sales.

As a result of all this, the profitability of companies would be, in most branches, at levels higher than those of before the pandemic, despite the fact that the higher costs of debt service would be slowing down the growth of the business benefits.

As in the case of households, corporate debt to income ratios have also fallen in recent quarters, although the proportion of profits allocated to debt service has picked up.

In this context, the proportion of financially vulnerable companies would have continued to decline and there are no signs of a significant deterioration in the credit quality of companies. Thus, doubtful loans and loans under special surveillance in this sector have continued to fall in recent months.

In 2022, coinciding with the tightening of the ECB's monetary policy, an increase was observed in the percentage of companies with difficulties accessing credit. This percentage would have been above 11% in the last wave, which covers the period between October 2022 and March 2023, and would have thus been placed at maximum levels since 2016.

The results confirm that there are greater difficulties in accessing credit for smaller, younger and more vulnerable companies.