The situation around Ukraine has shaped policy and markets since 2022. Legislation approved that year affected families, businesses, and governments, with permits lingering into 2023 and 2024. Interest rates continued to press on household purchasing power, investment, and public budgeting. Growth remained modest and inflation stayed higher than prewar expectations, yet there were surprising positive signs in Spain, across the Eurozone, and in the United States.
Inflation remains the central challenge
The Russian war in Ukraine accelerated inflation by driving up energy costs and raw materials, which gradually permeated the economy. The rapid rise in prices eroded purchasing power and forced governments to deploy considerable public funds to cushion workers and households. Governments implemented inflation-fighting measures as Europe faced disruptions to energy supplies from Russia. Inflation rose quickly, although the pace eased over time. In Spain, annual inflation moved from the mid-teens to the mid-single digits within a few months, and the euro area followed a similar pattern. Central banks signaled that inflation had peaked, but the duration of elevated rates remained a key concern for financial stability. Prolonged inflation could trigger a wage-price spiral, raising the risk of sustained pressure on both households and euro-area finances.
There is broad agreement that inflation may have reached its ceiling, though the persistence of rates above typical targets remains a critical question for stability in monetary policy and for state budgets.
Rates rise with a purpose
To curb inflation, euro-area central banks and their peers in the United States and the United Kingdom raised policy rates decisively. In the eurozone, the policy rate lifted from 0% to around 3% in roughly seven months. The main mortgage rate index, the one-year Euribor, jumped from negative territory to a positive level, marking the fastest ascent in home loan costs on record. The trajectory suggested higher mortgage payments through the first half of the year, with analysts projecting a possible peak near 4% by mid-year. The European Central Bank signaled that rates could stay elevated for an extended period, though policy authors maintained a cautious outlook. For states facing higher debt following the pandemic, tighter financing conditions added another layer of risk to public finances.
Public accounts: spending and receipts
Six anti-inflation measures introduced by the government in 2022 were estimated to have a sizable impact on the budget, with additional measures anticipated in 2023. Independent assessments showed a rise in revenue relative to GDP, helped by inflation. The central government benefited from extra collections that supported a modest improvement in the 2022 fiscal position, despite increased spending aimed at mitigating inflation. Looking ahead, revenue growth in 2023 could be harder to repeat. Provisional taxes related to energy, banking, and capital assets were approved, with projections suggesting these could contribute several billion euros in 2023 and again in 2024 to fund relief efforts for the economy.
Escaping a recession
Even with the Ukraine conflict weighing on activity, Spain posted a robust 2022 GDP expansion of around 5.5%, roughly in line with the previous year. The Eurozone also showed resilience by year-end, avoiding a broader downturn. Forecasts for 2023 suggested slower growth for the region, with Spain expected to ease to about 1.3% growth. The IMF outlook for the euro area anticipated a slowdown in 2023 followed by a modest rebound in 2024, as policy measures and external factors stabilized.
Labor market resilience
Despite wartime headwinds and mixed growth, Spain’s employment performance exceeded expectations. Full-time equivalents rose by about 3.8% in 2022, helping to keep the unemployment rate lower than feared. This positive labor market outcome paralleled gains across the euro area and the United States, even as some analysts attributed the improvement to reforms implemented at the start of the year. The broader labor market remained a bright spot amid slower overall growth, underscoring the policy framework that supported job creation.