BBVA Research has revised upward its estimate of Spanish GDP growth for 2022 to 4.4 percent (from the 4.1 percent forecast three months ago), although its outlook has deteriorated for 2023, when growth is expected to reach just 1 percent (from the previous 1.8 percent). This is according to the latest 'Situación España' report, presented today by Jorge Sicilia, Director of BBVA Research and BBVA's Chief Economist; Rafael Doménech, Head of Economic Analysis; and Miguel Cardoso, Chief Economist for Spain.
GDP growth in Spain is expected to have accelerated slightly in the second quarter of the year, thanks to the momentum of non-resident consumer spending, particularly in sectors that have benefited from increased health security and the normalization of socialization, such as restaurants, transportation, leisure and entertainment, as well as spending on clothing and footwear. In addition, exports of goods have continued to show some strength despite the increase in production costs and the obstacles associated with interruptions in the production chain.
However, BBVA Research believes that the figures for the last few months indicate a weaker recovery, meaning that activity could have stagnated by the third quarter of 2022. This situation could continue during the coming quarters, or even moderate drops in the evolution of GDP could be recorded as a consequence of increased uncertainty, the rise in inflation expectations and higher interest rates.
On the one hand, the end of the tourist season would explain the decline in the evolution of employment. On the other hand, cost increases are expected to be permanent, so companies are beginning to transfer them partially to prices and workers are beginning to negotiate higher salaries. As a result, inflation will be higher than expected in the coming months and will take longer to normalize. This has meant that the ECB has brought forward the increase in interest rates, and that markets expect a higher arrival point than was forecast a few months ago. The monetary policy rate has risen 125 basis points (bps) since June and could rise another 125 bps before the end of the year, moving towards neutral, or even slightly restrictive, in the opinion of BBVA Research. This will be a burden on the growth of private consumption, which economists at BBVA Research estimate at around 2.2 pp in 2023.
Meanwhile, the outlook for investment has deteriorated due to greater uncertainty, higher financing costs and the lack of recovery in margins, while doubts remain as to when the Next Generation EU (NGEU) funds will begin to accelerate their arrival in the economy. In this regard, BBVA Research has once again reduced its estimate for the execution of NGEU funds. According to its calculations, spending associated with these projects could reach between 9 and 15 billion euros by year-end 2022, rising to 21 billion euros in 2023.
The BBVA Research report asserts that there is still a high structural imbalance in public accounts: the primary structural deficit (permanent throughout the cycle, net of debt interest) would be between 1 and 2 percent of GDP, so each reduction in the tax burden or increase in spending must have an associated counterpart that ensures, at least, a neutral impact on the balance sheet. BBVA Research also highlights the importance of taking steps to guarantee pensions, and that the availability of the funds associated with the NGEU program are contingent on the satisfaction of different milestones, one of which is the long-term sustainability of public accounts.
In the opinion of BBVA's research division, the reform process must be further promoted if unemployment and precariousness are to be reduced. The ‘Situación España’ report stresses that the labor reform has simplified the types of temporary contracts, restricted their use and made permanent contracts more flexible (in particular, permanent seasonal contracts), which results in more stable jobs; but at the same time, the implementation of the reform presents challenges that must be addressed in the coming years. Moreover, the transition to a new production model requires a better training system to prepare workers for the jobs needed by the most productive companies. Indeed, low productivity growth is an endemic problem of the Spanish economy, limited by the small size of companies and the level of entrepreneurship.