The Spanish economy has faced a deteriorating revenue picture since late last year, with the Bank of Spain delivering a third consecutive downward revision to its forecasts. The central bank, led by Pablo Hernández de Cos, now projects Spain’s GDP to grow 4.1 percent this year, slightly below the consensus of governments and analysts at 4.3 percent and lower than the agency’s earlier projections in April (4.5%) and December (5.4%). From a September 2023 forecast of 6.3 percent, the path has been trimmed by 2.2 percentage points.
Behind this dimming outlook lies an inflationary spiral that began last summer and was intensified by the Ukraine conflict. The central bank softened its near-term view due to these pressures. Annual inflation for 2022 is seen at 7.5 percent, but it is expected to fall to 7.2 percent this year thanks to the Iberian mechanism that lowers electricity costs, which should shave about 0.5 percentage points from the CPI in 2023. At the same time, forecasts for underlying inflation were raised for 2023 to 2.6 percent and for 2024 to 1.8 percent, with core inflation excluding energy and fresh food now projected at 3.2 percent, 2.2 percent, and 2.0 percent respectively. The central bank cautioned that the pace of price increases has surprised on the upside and may remain elevated for longer than previously thought.
Despite these pressures, the institution nudged up its outlook for job creation and hours worked in 2023, even as employment growth slows in 2024. The unemployment rate is forecast to ease from last year’s 14.8 percent to about 13 percent this year, then to roughly 12.8 percent and 12.7 percent in the following years, a performance seen as stronger than earlier projections in April. Public deficits are projected to narrow more quickly, moving from 6.9 percent to about 4.6 percent in 2023 and further to around 4.2 percent in 2024, against prior April estimates that were higher.
uncertain stabilization
The macroeconomic path now appears more stable, though the growth outlook for the next two years shows only modest improvements: 2.8 percent in 2023 and 2.6 percent in 2024. The 0.4 percentage point downward revision for this year largely reflects a weak first-quarter performance (0.3 percent), a result of the continuing effects of the Omicron variant and the Ukraine conflict. Still, the economy benefited from better-than-expected performances in sectors hit hardest during the pandemic, notably hospitality and tourism. Overall, observers say activity has gained some momentum in recent months.
Even so, the pre-pandemic GDP level is not expected to be fully regained until the latter half of 2023, with the third quarter previously anticipated as the turning point in 2022. The Ukraine crisis remains a drag on activity by pushing up energy, mineral, and food prices. Combined with supply chain bottlenecks and a gradual global reordering of demand, these factors impede quicker growth. Yet positive factors counterbalance the negatives, including the removal of certain health restrictions, supportive financial policies, and a revival in business confidence following the war’s initial shock.
As a result, the Bank of Spain projects growth in the second quarter to be about 0.4 percent higher than in the first, albeit with a high degree of uncertainty. The broader trajectory hinges on global conditions and the pace at which supply constraints ease, especially in energy and key materials.
end of the year
Looking ahead, the central bank sees near-term activity as a mixed bag. A notable recovery in confidence, improved supply dynamics, and the continued activation of European funds could bolster growth in the second half of the year. Still, tighter financing conditions stemming from higher interest rates may temper the expansion pace. Inflationary pressures are expected to persist in the short term due to the Ukraine war, China’s ongoing COVID-19 policies, and the indirect pass-through of higher production costs to consumer prices. However, most of these cost-to-price transfers have already occurred, and wage growth shows only limited responsiveness to inflation, which may help ease price pressures over time.