The Bank of Spain cuts its forecast for GDP in 2023 to 1.3%, but removes the possibility of recession

GDP, which will grow by 4.

The Bank of Spain cuts its forecast for GDP in 2023 to 1.3%, but removes the possibility of recession

GDP, which will grow by 4.6% this year, will recover its pre-pandemic level between the end of 2023 and the beginning of 2024


The Bank of Spain has slightly revised upwards --one tenth-- its forecast for growth of the Gross Domestic Product in 2022, to 4.6%, but has cut its projections for 2023 by one tenth, to 1.3% , due, above all, to the worsening of the external context.

The body led by Pablo Hernández de Cos has also revised downward, by two tenths, the average growth of GDP in 2024, to 2.7%, mainly due to the probable extension in 2023 of part of the measures in force during 2022 to reduce the impact of the energy crisis, whose withdrawal at the beginning of 2024 will give rise to "a small negative impact" on the activity in said year. In addition, the body has published for the first time its projections on the growth of the economy in 2025, which stands at 2.1%.

Under all this projected trajectory, the GDP of the Spanish economy will recover its pre-pandemic level between the end of 2023 and the beginning of 2024, according to the latest Quarterly Report on the Spanish Economy published this Tuesday.

According to the report, the degree of dynamism of economic activity in the final stretch of the year would have been similar to that registered during the third quarter. The weakness of consumption due to inflationary pressures and high uncertainty is one of the main factors behind the modest increase in GDP forecast for the fourth quarter, which would grow by 0.1%, compared to the 0.2% registered in the third .

For the first quarter of 2023, the economic evolution will be more or less similar to that of this fourth quarter, as highlighted by the General Director of Economy and Statistics of the Bank of Spain, Ángel Gavilán, who has highlighted the "appreciable resilience" of the Spanish economy.

If these forecasts come true, Spain would manage to avoid entering a situation of 'technical recession' -two consecutive quarters of GDP contraction-, although Gavilán has indicated that "it is rash to rule out any scenario in a context of such volatility".

The Bank of Spain anticipates that starting in the second quarter of next year, economic growth would gradually regain strength, as, among other factors, agents' real incomes improve -- as a result of the gradual decrease in inflationary pressures --, foreign markets recover and investment projects linked to the 'Next Generation EU' program are deployed.

In addition, the foreseeable extension of some of the measures to mitigate the effects of inflation will add four tenths of a percentage point to next year's GDP growth.

However, from the Bank of Spain it is pointed out that, instead of extending until the end of 2023, the support measures contemplated were only extended until the end of next June, average inflation in 2023 would be seven tenths higher than in the central scenario, while the increase in GDP would be one tenth less.

On the other hand, a hypothetical extension of the fuel price bonus until the end of 2023 would reduce average inflation by six tenths of a percentage point in that year, compared to the baseline scenario, but would increase it by the same amount in 2024. On the other hand, , the impact on GDP growth would be one tenth upward in 2023 and one tenth downward in 2024.

As for inflation, the Bank of Spain has cut its forecasts for 2022 from an expected average of 8.7% to 8.4% for this year. In addition, prospects are improving for 2023, when the CPI will stand at 4.9%, more than half a point less than the previous forecast (5.6%). In 2024, rates of 3.6% are estimated, compared to 1.9% of the previous forecast and for 2024 it is expected to be 1.8%.

Thus, the organization sees it likely that inflation rates will remain at relatively high levels for several quarters in a context in which there are still no signs of significant second-round effects through wages or business margins in aggregate terms.

However, from the Bank of Spain it is pointed out that the information of the National Accounts by branches of activity reveals a more dynamic behavior of the business margins of the manufacturing sector and of the extractive, energy and water industries, in contrast to the weak margins in the construction sector.

For its part, the agency has anticipated that the moderation in the rate of increase in food prices and the resumption of the fall in the underlying inflation rate will take a little longer to occur, given that the transmission of recent cost increases to the prices of all consumer goods and services.

In this sense, it forecasts that the underlying component will reach 3.8% this year, compared to the previous 3.9%, and will moderate to 3.4% in 2023 -- lower than the 3.5% of the last estimate -- and 2.2% in 2024, one tenth higher than the previous forecast. In 2025, this reference would stand at 1.8%.

In any case, these price projections rest on two assumptions. On the one hand, it is assumed that, although incomplete, an appreciable part of the transfer to the companies' final sales prices of past cost increases would have already occurred. On the other hand, it is assumed that, in line with the evidence available to date, there are no "significant" second-round effects over the projection horizon, via margins or wages, that could trigger feedback phenomena of the current inflationary pressures.

All this, in a context in which the household savings rate has been falling in recent quarters from the maximum reached in the second quarter of 2020 --25.1%--. Specifically, the Bank of Spain warns that the household savings rate has maintained a clearly downward path, reaching 8.5% in the second quarter of this year, very close to its historical average --of 8.3%--.

In addition, the agency forecasts that investment in housing would continue its path of slowdown in the fourth quarter, although prices would be showing some downward resistance.

Regarding the evolution of employment, the institution has maintained the forecast for this year, in which it expects an average unemployment rate of 12.8%, although it would rise slightly to 12.9% in 2023, it would moderate in 2024 on 12 .2% and would end 2025 at 12%.

For its part, the agency improves its estimates of income and expenditure for this year, since the public deficit will remain at 4.2% of GDP in 2022, compared to the 4.3% previously estimated. Thus, the Bank of Spain points out that public revenue continues to show strong dynamism and suggests that the deficit of public administrations in the whole of 2022 could be less than that contemplated in the Budget Plan (5%).

However, there is a slight worsening of the prospects for 2023, with a rate of 4.1% compared to the previous 4%, but six tenths better than that of 2024 at 3.7%. After this decrease, the deficit would rise again to 4.5% in 2025.

Regarding its estimates for the debt in 2022, the agency has improved its forecasts after now placing it at 113.1% of GDP, compared to the 113.3% previously forecast. Looking ahead to 2023, the debt will stand at 110.6% of GDP and in 2024 it will drop below the 110% threshold and stand at 108.8%. In 2025, it will rise slightly to 109.8%.

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