Almost everything that matters for restarting the country’s economic path is tied to the energy crisis and its closest cousin, inflation. The main headwinds Spain faces in the coming months and quarters, mirrored across Europe and the world, are bound to inflation. The path to recovery hinges on preventing inflation from becoming more intense and persistent. Breaks in the trend must be kept to a minimum.
According to economist Nuria Bustamante, chief economist at Caixabank Research, the near future for the Spanish economy centers on the energy crisis and its impact on five critical levers: access to gas and its price, the real purchasing power of families and businesses, and the trajectory of growth. The broader European context and the stance of monetary policy, along with how market participants respond to rising uncertainty, shape the outlook. Bustamante’s framework highlights ten facets that capture the main challenges ahead in the economy’s path to normalization.
1. Higher energy costs
August closed as a record month for electricity bills. The wholesale price averaged 307.80 euros per megawatt hour, nearly triple the level from August 2021 (105.99) and close to seven times the 2019 price (44.96). The debt-lamping mechanism on gas used for electricity generation, known as the Iberian exception, helps cap further price increases. As a result, the average household electricity bill in August rose to 130.99 euros, up from 68.45 a year earlier. With the war in Ukraine continuing and gas prices elevated due to cuts in Russian supply, setting a ceiling on electricity remains challenging. Gas prices are likewise critical for heating this winter. Spain is currently eyeing austerity measures rather than rationing, even as fuel prices show only modest signs of relief. Across the summer, average fuel prices showed a dip of about 16.6 percent, yet gasoline remained roughly 26 percent higher and diesel about 44 percent higher than a year ago, aided by a government bonus of 20 cents per liter through year-end.
2. Curbs on energy use
Europe-wide goals call for reducing gas consumption by 15 percent, with Spain targeting about 7 percent. A contingency plan for winter is being drafted by the government. In Spain, austerity measures already touch shop windows and public buildings, set air conditioning at 27ºC, heating at 19ºC, and close doors in retail spaces. Brussels awaits the plan by the end of September. While consumption limits are not formally allocated, there is little doubt that energy pressures from the conflict and supply cuts will echo through households and firms. Without mandatory restrictions, many families risk energy poverty, and many companies are already curbing use and will likely do more.
3. A ten percent fall in purchasing power
The surge in energy costs remains the main driver of inflation, which stood at 10.4 percent in August, a four‑tenths drop from July. The vice president for the economy, Nadia Calviño, remains cautiously optimistic that inflation will ease in the coming months, while acknowledging sustained war-related uncertainty in Ukraine. The problem goes beyond energy. Food prices, such as eggs up 22 percent and chicken 16.3 percent higher, contribute to the pressure. Even after stripping out the most volatile items, core inflation reached 6.4 percent in August, signaling that the inflation pulse is broadening across the economy and feeding through to prices widely. A weaker purchasing power base translates into slower consumption and investment, with a meaningful risk of a broader slowdown.
4. Rising interest rates
Central banks around the world have begun tightening to fight inflation. The European Central Bank raised rates by 0.50 percentage points in July, the first such move in 11 years, with markets debating whether another 0.50 or a larger 0.75 point increase would follow on September 8. The aim is to signal resolve against persistent inflation, encouraging households and businesses to bear temporary income adjustments. The Euribor, a benchmark for floating-rate mortgages, ended August at about 1.249 percent — the highest since May 2012 — after a substantial year‑on‑year rise. Banking groups estimate further increases could push monthly mortgage costs higher, adding pressure to family budgets and loan balances.
5. The risk of stagnation
Inflation erodes household purchasing power, and consumer spending is cooling. July retail sales fell by 11.7 percent, subtracting inflation. Firms that cannot pass cost increases to prices see shrinking margins. Uncertainty remains high about when the energy and price surge will ease. A recession is not deemed imminent in Spain, but forecasts point to a slower eurozone economy with a couple of consecutive quarters of contraction. The Airef watchdog has projected a 0.2 percent quarterly GDP drop for the third quarter, marking a softer growth pace against the prior quarter.
6. A cautious autumn ahead
Wage growth across recent bargaining rounds has been modest, while many companies struggle to fully compensate for rising energy and raw material costs. Trade unions warned of a difficult autumn if wages fail to catch up with inflation, and policymakers voiced concerns about possible tensions. Economists urge careful handling to avoid a wage-price spiral, stressing the need for disciplined administration and targeted relief to vulnerable groups, alongside efficient public spending.
7. The elusive income agreement
Analysts argue for a three‑pillar income settlement involving workers, business leaders, and government, a package that has repeatedly been discussed but not delivered. The risk is that inflation could extend its grip if the state does not help distribute the burden through negotiated settlements that keep price pressures in check. The focus remains on whether a three‑year framework for wage bargaining among employers and unions can finally take shape, and how the minimum wage and other social protections might anchor living standards without fueling further price hikes. Proposals continue to center on a formal agreement among civil servants, retirees, and the private sector to share the inflationary costs.
8. The state budget in a tight climate
Amid the inflation surge and the risk of economic slowdown, the 2023 State Budget faces negotiations in a pre‑election period. Some measures may be delayed, but the government aims to set the policy direction. Key items include remembering public sector wage and pension adjustments through 2023, and considering the fiscal impact of two new taxes targeting extraordinary profits for banks and energy companies. There is also talk of reserving major tax reform for a future legislative period and rethinking the regional financing model to replace the one that expired years ago.
9. Pension reform remains controversial
Last year, the government paused the third round of pension reform after progressing reforms that updated subsidies with inflation and revised early retirement and self‑employment rules. The controversial issues involve extending the calculation period for pensions or raising the maximum contribution base, both of which draw opposition. Analysts warn that any misstep could escalate the cost burden on the system and spur social tensions if not managed with care. The challenge is to finance reforms without triggering new rounds of price hikes that would feed back into wages and living costs.
10. A compact recovery plan on the horizon
The energy crisis and inflation have shifted attention away from the larger European Recovery funds program. Spain’s plan for Recovery, Transformation and Resilience, along with a potential new investment and reform package, is framed as a condition for accessing further grants and favorable loan terms. The emphasis remains on productive investments that align with green, digital, and social transitions, alongside reforms that can unlock the next phase of growth while ensuring fiscal sustainability.