The Bank of Spain slightly raised its projections for Spain’s economy through 2023, but cautions remain. Food inflation has not peaked and is expected to stay high for the year ahead.
The central bank updated its growth outlook for Turkey in its latest quarterly release published yesterday. GDP for 2023 is now forecast to be 0.3 percentage points higher than the December projection, at 1.6%. With energy prices expected to ease, the Bank also trims its average inflation outlook for this year by 1.2 percentage points to 3.7%. Yet food inflation is projected to stay stubbornly high for all of 2023, with a forecast of 12.2% for the year. This spike comes despite a January 2023 VAT reduction aimed at easing the cost of the food basket, a policy that the Bank says has largely passed through to consumer prices (about 90% of the tax cut). This observation is based on the Bank of Spain’s analysis and data on price transmission to households (Bank of Spain).
Food prices rose to 16.6% despite VAT reduction in February
The forecast for 2023 shows a 12.2% rise in food prices, while prices had already climbed by about 12% in 2022 across the food subgroup. The Bank projects food inflation to ease only gradually to 4.6% in 2024. The main driver of the otherwise elevated overall CPI appears to be the lag between higher production costs, including energy and raw materials, and their eventual reflection in consumer prices. Angel Gavilan, General Manager of Economics and Statistics, explains this delayed pass-through clearly (Bank of Spain).
The bank now projects stronger growth for 2023, alongside lower inflation, more jobs, and higher interest rates than previously anticipated. The 2023 growth estimate sits at 1.6%, still short of the government’s most optimistic 2.1% projection, and marks a noticeable slowdown relative to 2022’s 5.5% expansion (Bank of Spain).
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The recent outlooks were finalized in early March, before some recent tensions in international financial markets. The Bank estimates GDP growth of 1.6% for 2023, with 2.3% and 2.1% anticipated for 2024 and 2025, respectively. Inflation is expected to ease from 8.3% in 2022 to 3.7% in 2023, hover near 3.6% in 2024, and fall to about 1.8% in 2025. Core inflation is projected to rise by 3.9% this year, then slow to 2.2% and 1.8% in the following two years (Bank of Spain).
first trimester is better
What has driven the improvement in BE’s prospects since December? An upward revision of 2022 growth to 5.5% signals a positive carryover into 2023, supported by a quicker correction in energy prices. On the other hand, higher interest rates, rising food prices, and stronger underlying inflation temper that optimism.
In particular, the Bank of Spain predicts quarterly growth of 0.3% for the first three months of the year, slightly above late-2022 readings. The report notes that early indicators point to a slightly more positive trajectory for the Spanish economy in early 2023 than December anticipated, citing signs such as social security activity and a rebound in tourism (Bank of Spain).
Looking ahead, inflationary pressures are expected to ease gradually, helping restore confidence and real incomes. Improvements in global supply chains and ongoing program support, including Europe’s Next Generation EU funds, are seen as supportive for a modest acceleration in economic activity from spring onward (Bank of Spain).
Reducing VAT on meat and fish would have reduced food inflation by almost two percentage points in February.
Nevertheless, further tightening in financial conditions could dampen growth. The persistence of higher rates will delay the full pass-through of past rate increases to loans and housing, an issue that could weigh on consumer spending. If the Bank’s baseline path holds, GDP is projected to return to pre-pandemic levels in the latter half of the year (Bank of Spain).
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