“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.
(Interventions ordered from left to right and from top to bottom)
Matilde Mas. Director of international projects at Ivie.
Measure well the effects of inflation.
“The most dangerous thing is to make mistakes with inflation. Above all because there is a campaign of contractive monetary policies in the different central banks. The big risk is making inflation forecasts that are harsher than they actually end up being. The ECB affects All countries and inflation rates are very different in them, Spain’s is among the lowest. The toughest stance of the ECB leaders worries me, because if you make a mistake and overdo it you can do a lot of damage. That would be the big risk.”
Miguel Cardoso. Chief Economist for Spain at BBVA Research.
Real and nominal wages.
“Going forward, the evolution of real wages will be key. How the nominal salary will increase and how inflation will evolve. It’s going to be very important to see how core inflation, which remains high, evolves, and whether we move into an environment of consistently high inflation in the coming years. Also, if you are going to be able to be compensated in a certain part by wages. If what we are going to see is a constant loss of purchasing power of families, what we can see is a decrease in consumption”.
Maria Jesus Valdemoro. IESE Lecturer.
Monetary and fiscal policies.
“We must review how the rise in rates will affect the public debt. We are at very high debt levels. The tightening of rates will reduce the maneuvering capacity of all administrations. Governments are going to have to pay more interest and, furthermore, in 2024 the fiscal rules will come into force that will push us to carry out an effort to counteract the structural deficit. We have to think about both monetary and fiscal policy, as well as what will happen with the recovery of real wages”.
Oriol Aspachs. Director of Spanish economy at Caixabank.
The evolution of energy prices.
“Energy prices are the ones that feed and stop feeding the pressures on the prices of other products. If the de-escalation we are seeing is confirmed, it is very good news. Other factors have been unleashed from this shock, such as second-round indirect effects, which must be tracked. Although its evolution is uncertain, we will have to be aware of how the conflict continues, the reopening of China after the pandemic or the development of investments to build regasification plants in Europe”.
Maria Jesus Fernandez. Senior Economist at Funcas Economics.
The endurance of employment and the ERTE.
“On the positive side we have the intrinsic strength that employment has shown so far. ERTEs can also be very useful at this juncture. Companies that are greatly affected by the increase in energy costs, instead of reducing staff, can resort to ERTES, at least temporarily. This resistance is very important for sustaining consumer confidence and sustaining spending. In addition, this strength of employment tells us about a strength of the economy”.
The latest report from CaixaBank Research estimates that Spain will grow by 1% in 2023 and 1.9% in 2024. Regarding the CPI, the credit institution states that the year will close at 4.6%.
The resistance of the European economy has led Goldman Sachs and Deutsche Bank to modify their economic forecasts for the region. The US entity believes that the eurozone will get rid of recession with an increase in GDP this year of 0.6%. Goldman’s forecasts give the eurozone a breather, which in recent months has also been marked by the risk of a recession. Deutsche Bank also considers that, taking into account the latest business confidence data, they suggest that in the euro zone “there will not even be a recession” this winter. Among the factors to change his view is the sharp decline in gas prices, which will further eliminate the risk premium. The reopening of China will also be positive for Europe.
UK GDP growth slowed to 0.1% in November and dodged contraction. Something similar has happened in Germany, where GDP grew by 1.9% in 2022 and has already exceeded the pre-pandemic level. Germany was one of the countries most exposed to Russian gas supplies before the conflict.