The Bank of Spain cuts its growth forecast for 2021 by two points to 4.5%

  • The virus, energy prices, inflation and the slow roll-out of European funds slow the recovery

  • The body now sees more weakness in this year and in 2022 but improves its projection for 2023

The Bank of Spain estimates in its latest forecasts that the Spanish economy will grow this year at around 4.5%, almost two points less than what the body itself estimated in September (6.3%) and a little further still from the figure that, against all odds, the Government still maintains for 2021, 6.5%.

The governing body Pablo Hernandez de Cos presented this Friday its new forecasts for the Spanish economy up to 2024 which, broadly speaking, if compared with those published in September, strongly cut the estimates for 2021 (up to 4.5%); slightly lower those of 2022 (up to 5.4%) and, in return, the prospects for 2023 (up 3.9%), before returning GDP growth to a cruising speed of 1.8% in 2024.

“According to the most recent projections of the Bank of Spain, the recovery of the Spanish economy will continue in the next triennium“It is stated in the quarterly report. All in all, the slight puncture of the Spanish economy in 2021 and 2022 will end up delaying the recovery of the level of Gross Domestic Product (GDP) prior to the pandemic until early 2023. All this in a context higher inflation (the CPI forecast for 2022 doubles, to 3.7%) and a worsening of the prospects for deficit for next year and the following, but of constant recovery of employment.

The causes

The intense downward revision by the National Statistics Institute (INE) of the GDP growth data for the second quarter at the end of September and the ‘negative surprise’ for the third quarter (with quarterly rates of 1.1% and the 2% respectively) are at the base of the worst figures now presented by the Bank of Spain for this year, which include a moderation of the growth rate in the fourth quarter (which will go from 2% of the third to 1.6%). The crisis of supplies, the rising cost of energy, inflation, the new wave of the virus and the delay in the investments of the Recovery Plan are the other factors that weigh on the current perspectives of the Bank of Spain. These factors translate into the economy in the form of less private consumption, a higher savings rate, and a decline in productive sectors such as industry and international tourism. In particular, the Bank of Spain estimates that the recovery of international tourism will be delayed until 2023 or 2024.

To give an idea of ​​the burden of some of these factors on economic growth, the Director General of Economics and Statistics of the Bank of Spain, Oscar Arce, pointed out that the elevated energy prices will subtract half a point from GDP in 2021 and one point from 2022. For their part, bottleneck in the international supply chain they can subtract between two and three tenths that year and between five and nine the next. In the case of the Recovery Plan, the Bank of Spain estimates that the low execution of investments related to the European funds they will barely contribute three tenths to growth in 2021, far from the two percentage points expected by the Government; the favorable impact of European funds shifts to 2022 and 2023 (adding about two points to the growth of each of those years) and to 2024 (1.4 points).

Official optimism

For this year and next, the economic forecasts of the Spanish Government are consolidated as the most optimistic (6.5% and 7% for each of the two years), above those formulated by the Airef (5.5% and 6.3%), the European Comission (4.6% and 5.5%), the OECD (4.5% and 5.5%) or the average of the Funcas panel of economists (4.8% and 5.7% respectively).

“We see a clearly less dynamic recovery in Spain than that seen in the euro zone and in our main partners,” said Óscar Arce. Specifically, the output gap with respect to the pre-crisis level in the third quarter amounted to 6.6 percentage points in Spain compared to 0.3 points in the euro zone.

Better evolution of employment

The Bank of Spain now sees more inflation in this year and the following and anticipates a creation of job (in terms of hours worked) somewhat slower, compatible, in any case, with a better evolution of the unemployment rate.

While the recovery of the pre-pandemic level of GDP is now delayed in early 2023, the levels of Social Security affiliation have already been rescued in November of this year. “This evolution confirms an outstanding feature of recent economic developments, such as the fact that the recovery in employment is being faster and more vigorous than that of GDP “, states the Bank of Spain in its quarterly report.

Related news

It is this favorable evolution of employment that constitutes the Government’s main argument to reduce the severity of the cascade of downward corrections in growth forecasts, such as the one published this Friday by the Bank of Spain. The favorable evolution of income, with growth above that of the economy, is the other argument of the Executive to relativize the bad news of worse growth.

Regarding the rise in inflation, the Bank of Spain expects that after the rebound to 3% and 3.7% this year and next, rates will return to levels of 1.2% and 1.5% in 203 and 2024. “At the moment this inflationary rebound is concentrating on a relatively limited, albeit growing, proportion of goods and services,” Arce diagnosed. “No significant second-round effects are perceived at the moment,” added the director of the Bank of Spain’s economy regarding the risk of an inflationary spiral in prices and wages.

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