Early in the year, expectations for the European economy pointed to solid and sustained growth. The war in Ukraine shattered those forecasts, sending negative repercussions through the Eurozone and affecting countries like Spain. The European Commission’s latest spring projections indicate that Spain’s economy will grow on an annual basis, though at a slower pace than hoped, with growth of about 1.6% in 2022 and 3.4% in 2023. Inflation is projected to average 6.3% this year. While investments from NextGenerationEU and a revival in tourism will help, Spain is unlikely to return to pre-pandemic levels before mid-2023.
“Spain’s economy was gaining momentum in early 2022, but supply disruptions and rising inflation, intensified by the war, slowed activity from late February onward,” the Commission notes in its forecast document released this Monday. The result was a modest 0.3% quarterly growth in the first quarter, followed by an estimated 0.1% in the second quarter. The Commission subsequently trimmed its 2022 and 2023 growth forecasts to 4% and 3.4% respectively, indicating that pre-pandemic growth levels would not be recovered until mid-2023. National forecasts released late April lowered expectations to 4.3% for this year and 3.5% for next year.
Spain’s public debt projected to hover around 115% of GDP, per the IMF
Based on analyses by community technicians, the revival of tourism is set to remain the primary growth engine, gaining pace from the third quarter. This will be supported by a robust labor market and investments tied to the recovery program, funded by pandemic-era savings and a renewal of private consumption. Still, households face a shrinking purchasing power, with private consumption not expected to reach pre-pandemic levels in 2022 and 2023 amid higher prices and weaker real wages.
Additionally, the energy price shock adds uncertainty across the euro area, with Spain experiencing sharper increases. The Commission expects another price rise to hit activity, especially in sectors such as transport, construction, and energy-intensive industries, and notes that consumer and investment decisions may be delayed until the disturbances ease. The persistent inflationary impact on household purchasing power is a key risk, particularly for lower-income groups.
Inflation running at 6.3 percent this year
Brussels expects inflation to gradually ease toward the middle of the year, helped by policy measures like fuel relief and caps on wholesale gas prices. Despite this, annual inflation climbs from 3% in 2021 to 6.3% in 2022, with a projected drop to 1.8% in 2023. Core inflation, which excludes energy, remains elevated at 3.9% in 2022 and is forecast to fall to 2.7% in 2023.
Calviño signals a notable downgrade to Spain’s 2022 GDP forecast
On employment, the outlook from Brussels anticipates an improving job market and a lower unemployment rate, now near the lowest since the end of last year. The unemployment rate is expected to decline from around 14.8% to about 13.0% in the coming year, aided by ongoing job creation and the new RED mechanism that supports companies and workers in transition. Wages are expected to grow but at a slower pace than prices, which will likely dampen household savings and purchasing power.
Lower deficit and debt trajectory
The latest round of Spain’s economic review shows a better-than-expected public balance for the previous year and a recovery in activity that helped shrink the deficit from 10.3% of GDP to 6.9%. For 2022, authorities plan to continue reducing the public deficit through sound growth and sturdy revenues, driven by production and import duties.
Front-loaded expenditure measures to cushion the Russian war’s effects are designed to shrink the deficit from 4.9% in 2022 to 4.4% in 2023. This reflects solid growth and controlled spending. While indexing pensions could raise spending if inflation endures, some offsetting measures are planned as income gradually returns to normal elasticities. Forecasts also project a gradual reduction in public debt to about 113.7% in 2023.