The apocalypse that did not come: why has Spain managed to avoid the recession?

“As much as it weighs on some, the apocalypse has not arrived and will not arrive,” said the Prime Minister, Pedro Sánchez, last week. The consensus was clear a few months ago: Spain would suffer a recession with decreases of a few tenths during the last quarter of 2022 and the first of 2023. Although close to zero, employment data remains positive, consumption data too, and the CPI is the lowest in the European Union and stands at 5.7%, according to the INE. There has been neither misfortune nor economic catastrophe and, thanks to GDP growth of 0.1% in the third quarter of 2022, it seems that there is no recession either, why?

The economists, responsible for making the forecasts that predicted a bad evolution of the economy, assure that in the scenarios that were being considered, the negative effects of the crises were overestimated, which could have been mitigated better than expected. However, among others the Bank of Spain, AirefBBVA Research, Funcas and, more recently, Goldman Sachs and Deutsche Bank have gone from drawing their scenarios based on possible falls, to considering that the Eurozone in general, and Spain in particular, will avoid recession.

What was expected to happen has not happened. This is what Miguel Cardoso, chief economist at BBVA Research, believes: “It is not so much which indicators have changed, but the impact that those that were expected to come in the first half of 2022 have ended up having. We have not seen that the invasion has reduced consumption We haven’t seen an impact on the industry from the impact of energy. At the same time, what we have seen has been that people’s confidence to go out and be on the streets has been much higher than we expected.”

There have been unexpected surprises, for example, unemployment. Until not long ago, the usual thing was that, if the economy slowed down, unemployment skyrocketed. However, unemployment has been “decoupled from GDP”, as stated by the economist Maria Jesús Fernández from Funcas. GDP growth slowed from 2% in the second quarter of 2022 to 0.1% in the third of the same year. Although GDP slowed down, employment maintained its good pace and Spain led job creation during the third quarter in the Eurozone. This fact is unusual and “makes forecasting difficult” for economists, says Fernández.

But it’s not just employment. The economy as a whole is resisting, as highlighted by the director of the Spanish economy at CaixaBank, Oriol Aspachs: “In 2023 we expect the execution of European funds to gain momentum. Added to this is the recovery of tourism, the drop in prices of energy, although it will be necessary to see if they consolidate. We are at a moment in which the different factors that put pressure on the scenario have their impact, but we rule out that there is a deep recession”.

from black to white

The reason the forecasts have gone from black to white is twofold. First of all, in a general way, the difference between growing and not growing was minimal. It was expected that, if there was a recession, the economic contraction data would be very close to zero. On the other hand, to make accurate forecasts, economists need certain certainties. In the current context, in which nuclear bomb attacks by Russia have been suggested, certainty is conspicuous by its absence. María Jesús Valdemoro, IESE Lecturer, highlights this: “We don’t know what will happen with the war in Ukraine. We don’t know what will happen with the tightening of monetary policy, we don’t know what will happen with the restrictions in China. All of this It will continue to be present during 2023”.

The financial crisis of 2008 is still present. It is another factor that economists highlight to explain the general feeling of the population, a kind of pessimism due to past economic experiences. The director of international projects of the Valencian Institute for Economic Research (Ivie), Matilde Mas, believes it this way: “The context has gone better because we were all rowing in the same direction. The mistakes of 2008 have not been made. The measures that have been taken are reasonable, except for exceptions such as general fuel subsidies. Removing the deficit and debt problem, the measures are well designed and we should have confidence in ourselves. Although we are not used to it”.

The context has gone better because we were all rowing in the same direction. The mistakes of 2008 have not been made.

The habit of misfortunes has been able to distort perception. “There has been a divergence between the perceptions of companies, families and those of us who make economic forecasts. Because we know from past experiences that what we are experiencing has had negative effects on the economy, but what we see is that the economy is much more resilient to increases in energy prices. Nor have the worst forecasts come true, such as NATO going to war with Russia,” says the BBVA economist.

Has the worst happened?

If there are two consecutive quarters with declines in GDP, a country technically enters a recession. It does not matter if the contraction is -0.1% or -10%. Had there been a contraction, all the experts consulted highlighted that it would have been short and moderate. According to Aspasch, the current scenario is one of “modest positive growth rates”, so it is possible that the period that was marked in black in the 2023 calendar is being circumvented.

But the economy is far from at its best. “We talk about growth, but it will be little and they don’t have to make us believe that things are already good,” says Valdemoro. “In the first part of the year we will see how inflation derived from the supply chain crisis stabilizes. But lowering inflation from 10% to 5%, which was associated with the problems derived from the pandemic, has been relatively easy. During the rest of the year, lowering the current levels of inflation to the levels in which we have been comfortable around 2%, is another matter,” he concludes.

At least, that is to be expected, says the economist. But the pandemic, the invasion of Ukraine and inflation have made it clear that we live exposed to the unpredictable.