The Bank of Spain has improved the GDP (Gross Domestic Product) growth forecast to 2.3% this year, and maintains that for 2025 at 1.9%. The increase in the estimate in 2024 is four tenths, similar to that of the International Monetary Fund (IMF) last week, which reached 2.4%. Both projections exceed the optimism of the coalition government, a historical anomaly in these issues because the executives are the most interested in defending a positive vision of the economy.

The macroeconomic table that the Government sent to the European Commission at the end of April contemplates growth of 2% in 2024 and 1.9% next year. The new forecasts in the latest quarterly report from the Bank of Spain, the IMF and other international organizations that exceed this rate for this year demonstrate the inertia of activity in our country, which has not stopped surprising upward trends since 2021.

“The Bank of Spain points out the differential growth of our country among the main advanced economies. In fact, Spain will grow more than the euro zone as a whole during the entire forecast horizon (2024-2026),” says Carlos Body, the Minister of Economy, Commerce and Business.

The arguments provided by the Bank of Spain to justify the improvement of its projection are the same as those presented by the IMF. First, “the positive surprise in the first quarter of 2024”, which “has a lot to do with the strength of tourism.”

Second, due to the rebound in family consumption, favored by “the increase in real incomes – in line with the expected evolution of job creation, wages and inflation –, the increase in population and the improvement of the trust of families.”

Third, due to the reactivation of business investment, which is still below its pre-pandemic level, “it will also increase throughout the projection horizon, favored by the impulse coming from the Recovery Plan (whose deployment is expected to gain traction in 2024 and 2025) and for a certain improvement in financing conditions.” In fact, according to the Bank of Spain report, “in any case, at the end of 2026, investment will be the component of demand that presents the lowest accumulated growth since 2019.”

Finally, “net foreign demand will present a positive contribution to GDP growth in 2024, which will become zero in 2025-2026.” This positive contribution comes from tourism but not only, also from the exports of other services, one of the great structural transformations of our economy, together with the less precariousness of our labor market thanks to the increases in the SMI (Minimum Interprofessional Wage) and the precipitous drop in temporary employment due to the 2021 labor reform.

The monetary institution’s report does not mention the problem of access to housing in large capitals and in certain tourist destinations, which other organizations have pointed out as a vulnerability to economic growth, due to the threat it poses to family consumption or to the labor market, by hindering the mobility of workers.

Regarding inflation, the Bank of Spain raises the average projection of price increases in 2024 by three tenths to 3%, although it expects that, “in the coming quarters, food inflation will continue to slow down.” Of course, it warns that “the reversal of the VAT reduction on food from July 2024 [el Gobierno todavía tiene que decidir si lo prorroga o no, y lo hará cuando conozca el dato de mayo que se publica este jueves] “It will put some upward pressure on these prices in the second half of the year.” In 2025, it finally sees inflation normalized, at the theoretical objective of the European Central Bank (ECB) of 2%.

With these forecasts, the unemployment rate, which in 2023 stood at 12.2%, “will continue to reduce in the coming years, although at a slower pace than in previous years, due both to the expected moderation in the pace of job creation and the expected growth of the active population – which, as in recent years, will continue to be driven by relatively high immigration flows. As a result of all this, the unemployment rate of the Spanish economy will still remain above 11% in 2026,” details the quarterly report of the Bank of Spain.

Lowering of ECB interest rates

“In their latest monetary policy meetings, the ECB and the central banks of Canada, Switzerland and Sweden reduced their official interest rates, a process that a large number of emerging economies had already started in the second half of 2023,” explains the Bank of Spain. “Markets anticipate that the rest of the main advanced economies – with the exception of Japan – will begin this same process in the coming months,” he continues.

“In any case, in economies such as the United States and the eurozone, the markets expect that, in the coming months, interest rates – even if they are reduced – will be at higher levels than those anticipated in the middle of the first quarter. . This upward revision reflects, to a large extent, the perception on the part of the markets that inflationary pressures may be somewhat more persistent than what was contemplated a few months ago, in a context in which activity, employment and salaries “They continue to maintain considerable vigor,” he warns.

“The peak of the negative effect on the economy of the tightening of monetary policy in Spain would have materialized at the end of 2023 [por la asfixia de las familias hipotecas y a las dificultades para acceder a financiación en general]now it is lower,” commented Ángel Gavilán, general director of Economy and Statistics of the Bank of Spain, at the press conference to present its quarterly report.

“In recent months (until April) the pace of contraction of credit to households for home purchases has been reduced, the expansionary dynamics of consumer credit has been maintained and financing to companies has begun to register slight increases,” the report states. document.

The truth is that economic growth helps reduce the budget deficit (the imbalance between income and expenses, in relation to GDP) and indebtedness (public debt also in relation to GDP). Currently, the Government hopes to leave the deficit at 3%, as required by the EU, and continue reducing the debt.

New tax rules

“Overall, the expected tone of fiscal policy in 2024 – approximated by the variation in the primary structural balance – would be slightly contractionary. However, in 2025 and 2026 the budget guidance would become approximately neutral. In this regard, it is important to keep in mind that the application of the new European fiscal rules – in force since April 30 – will imply the need for a contractionary tone of Spanish fiscal policy from 2025, which is not incorporated in this projection exercise”, adds the Bank of Spain.

The fiscal assumptions with which the Bank of Spain works incorporate some new developments with an impact on the public deficit throughout the projection horizon, compared to the March forecast exercise. In particular, it includes: the extension of transitional income measures related to temporary levies on energy companies and financial institutions until 2025, which, together with other smaller changes, represents a reduction in the deficit of 0.1 percentage points of GDP in 2025 and an increase of 0.1 integers in 2026.

On the other hand, it introduces the recent rulings on the right to deduction by some mutual members in personal income tax and on the unconstitutionality of several provisions introduced by Royal Decree-Law 3/2016 relating to Corporate Tax. “Together, it is estimated that these two judicial decisions entail new spending obligations for the State that could imply an increase in the deficit of around 0.2 percentage points of GDP in 2024,” he calculates.

The risks

“In the external sphere, the main sources of uncertainty continue to be focused on the future evolution of the current sources of global geopolitical tension, global economic growth, the Chinese real estate sector and international financial markets — with some stock indices close to highs historical and with relatively low risk premiums—”, lists the Bank of Spain.

“At the national level, it is worth highlighting the uncertainty that exists in relation to the degree of persistence of the considerable dynamism that services, especially tourism services, have maintained in Spain in recent quarters. They also highlight the risks associated with the reactivation of fiscal rules at European level. In particular, compliance with these rules will require, in our country, the design and execution 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,” he concludes.


Leave a Reply

Your email address will not be published. Required fields are marked *