The Bank of Spain has slightly strengthened its balance sheet and released forecasts for the Spanish economy in 2023. In its quarterly report published this week, the central bank raised the 2023 GDP growth projection to 1.6 percent, up from 1.3 percent in December. At the same time, it trimmed its average inflation forecast for the year to 3.7 percent, reflecting expectations of easing energy prices.
Inflation is still expected to stay elevated through the year, with a notable rise in food prices. The Bank of Spain projects an average food inflation of 12.2 percent for 2023. Despite a VAT reduction implemented in January 2023 for a broad range of food items, the impact on final consumer prices was substantial, estimated at about 90 percent of the relief passing through to prices, an effect that was evident in December at 7.8 percent and reaffirmed in the bank’s latest estimates.
Taken together, the Bank of Spain now anticipates a stronger year for 2023 with higher growth, lower inflation, more job creation, and a modest uptick in interest rates than previously expected. The 1.6 percent growth forecast for 2023 remains timid in comparison with the most optimistic projections from the government at 2.1 percent, and it still contrasts with the strong advance of 2022 which stood at 5.5 percent.
The projections released on Wednesday were completed in early March, prior to recent turbulence in financial markets. Following a 5.5 percent expansion in 2022, GDP is projected to grow by 1.6 percent in 2023, 2.3 percent in 2024, and 2.1 percent in 2025, according to the bank’s projections. Inflation, which averaged 8.3 percent in 2022, is expected to ease to 3.7 percent in 2023, stabilize near 3.6 percent in 2024, and fall to around 1.8 percent in 2025.
GDP to rise 0.3 percent in the first quarter, with acceleration in spring and a return to pre pandemic levels in the second half of the year
Better-than-expected first quarter
What has driven the Bank of Spain to lift its outlook since December? A key factor is the upward revision of growth to 5.5 percent for 2022, which implies a positive carryover effect into 2023. Additionally, energy prices corrected rapidly. On the negative side, higher interest rates, rising food prices, and persistent inflation continue to weigh on the economy.
Specifically, the bank forecasts quarterly growth of 0.3 percent in the first three months of the year, a modest improvement of one tenth from the latter half of 2022. The report highlights indicators such as Social Security enrollment and the recovery of tourism activity as signs of stronger momentum.
Outlook for spring
The bank argues that from spring onwards economic activity should gain some momentum, helped by easing inflation pressures, improving confidence and real incomes, better global supply chains, and the continued deployment of European funds such as NextGenerationEU. However, any potential tightening in financial conditions due to higher interest rates could temper growth, and the full pass-through of rate hikes to loans and mortgages remains a live consideration. The Bank of Spain expects GDP to return to its pre-pandemic level in the second half of the year.
The 2024 growth forecast of 2.3 percent represents a reduction from the prior December projection by four-tenths. The coming year should not be viewed as a simple inflation correction exercise, given the expiration of price moderation measures introduced in 2023. This means a modest downward revision in inflation for 2024, with a continued expectation of 1.8 percent in 2025. Job creation is projected to continue in step with activity, with hours worked rising about 0.9 percent, compared with an earlier estimate of 0.5 percent.
Unemployment is expected to average around 12.7 percent of the labor force in 2023, a revision of two-tenths lower than previous projections. The public deficit is forecast to move from 4.6 percent of GDP in 2022 to 4.1 percent in 2023 and 3.5 percent in 2024, before edging higher to 4.3 percent in 2025. The new EU stability rules are expected to constrain deficits, while a projected increase in public spending mainly on pensions and the partial reversal of collection surpluses from 2020-2022 will influence tax receipts and public financing.
For public debt, the Bank projects a slight decline from 113.1 percent of GDP in 2022 to 111.1 percent in 2023 and 108.6 percent in 2024, followed by a rise to 109.6 percent in 2025, reflecting the fiscal path and debt dynamics considered in the outlook.