The Bank of Spain adjusted its growth outlook slightly downward for 2023, projecting growth of 1.3 percent, a tenth lower than its October forecast and eight-tenths below the government’s 2.1 percent target. Inflation is seen averaging 4.9 percent in 2023, down seven‑tenths from the 5.6 percent predicted in October. The revision comes as the central bank assumes the government will implement electricity and natural gas tax relief and suspend the 20‑cent-a-liter fuel bonus through 2023.
Neither of these assumptions is confirmed. Prime Minister Pedro Sánchez said a decision would be announced next week, just before year’s end. Under the Bank of Spain’s calculations, however, the government would extend these measures through December 31, 2023. The scenario includes VAT reductions to 5 percent on electricity and gas, a cut to the electricity excise to 0.5 percent, the temporary suspension of the IVPEE, and a cap on gas prices. These steps would widen the deficit by roughly 5.2 billion euros. The bank also considers a possible extension of free commuter rail passes and a small rise in non-contributory benefits, along with a new cap on raw material prices in the final-resort tariff for natural gas and related measures through year-end 2023.
Additionally, the Bank of Spain includes decisions already approved, such as extending these measures to the end of 2023, in contrast with October projections. The plan also foresees a maximum 15 percent cap on price increases for raw materials and a temporary extension of the rate reliefs on natural gas. The analysis highlights the impact of these steps on the deficit and the inflation path.
Extension in 2023 and withdrawal in 2024
Keeping these measures in place helps the Bank of Spain’s average inflation forecast for 2023 stand at 4.9 percent, seven‑tenths below the October projection. If the fuel bonus were to be extended to year‑end 2023, inflation could fall by an additional six‑tenths, bringing the rate to around 4.3 percent. Yet the government’s intentions on this point remain unclear, as reflected in statements by Vice President Nadia Calviño.
On the growth front, extending the anti‑crisis measures could lift GDP growth to 1.3 percent for 2023; without them, growth might slow to 0.9 percent. Expanding the crisis‑fighting measures would help sustain activity and keep inflation under control. Conversely, withdrawing the aid in 2024 could slow growth to 2.7 percent and push inflation to about 3.6 percent, nearly double the Bank’s October projection of 1.9 percent. In short, the 2024 transition would carry the consequences of the energy support policy into the following year.
Forecast chain to 2025
The Bank of Spain includes 2025 in its horizon for the first time, projecting GDP growth of 2.1 percent as the economy approaches its potential path, with average inflation of 1.8 percent. Overall, the new forecasts show growth of 4.6 percent for 2022, 1.3 percent for 2023, 2.7 percent for 2024, and 2.1 percent for 2025. Compared with October projections, 2022’s rate was raised by one-tenth, while 2023’s rate was trimmed by seven‑tenths and 2024’s by two‑tenths. The inflation path begins at 8.4 percent in 2022, falls to 4.9 percent in 2023, then to 3.6 percent in 2024 and to 1.8 percent in 2025.
The Bank’s growth outlook for Spain appears more favorable than the European Central Bank’s projections for the euro area, which foresee 3.4 percent in 2022, 0.5 percent in 2023, 1.9 percent in 2024, and 1.8 percent in 2025. Spain’s inflation path is initially in line with the euro area through 2023, then diverges in 2024 with Spain’s rate slightly lower and by 2025 about half a percentage point below the euro area’s 2.3 percent.
No recession in sight
The central bank notes that Spain is avoiding a technical recession, even as activity slows. Economists like Pablo Hernández de Cos see the fourth quarter of 2022 as the weakest point; despite only a 0.1 percent quarterly rise, the economy is expected to keep growing. While activity has decelerated, the Bank of Spain anticipates a gradual rebound in the second half of 2023 as household income improves, consumption strengthens, and European funds projects take shape. The external sector should develop, and investments linked to Next Generation EU are expected to contribute. It may take late 2023 or early 2024 for output to recover to pre‑pandemic levels.
Given the current volatility and uncertainty, the bank stresses that any outcome is not guaranteed. The forecast assumes a gradual improvement in household finances and a stabilization in external demand, supporting a gentle climb back to the pre‑crisis level in the near term.
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