• Household savings are depleted: halved by inflation and anticipate a slowdown in consumption

Funcas has raised its growth forecast for the Spanish economy from 1% to 1.5% for this year, due to the good performance of energy prices -which rise less than expected-, the recovery of tourism and the greater pace of execution of European funds, but has warned that the public deficit will stand this year at 4.5%, An "unsustainable" level that will begin to "give problems next year".

Specifically, of this expected growth of 1.5%, domestic demand will contribute 1.3 points, two tenths less than expected in the last projection, while exports will contribute 0.2 points, compared to the 0.5 points that were expected to remain in the previous estimates. The worsening in domestic demand is mainly due to the slowdown in private consumption due to the effect of inflation.

Funcas has cut the expected growth of household consumption from 1.2% to 0.7% this year, for two reasons: the erosion of purchasing power generated by the rise in prices and the fact that households no longerhave the savings they accumulated during the pandemic to increase their consumption, something that this newspaper has already warned. In 2022, although the income in real terms – without counting inflation – of families fell by 3%, their consumption grew in those terms by 4.5% thanks to the savings they had accumulated, but that will no longer be able to be maintained.

This slowdown in private consumption will be offset by investment, which will grow this year by 2.6% – instead of the 2.4% forecast in January – due to the faster pace of execution of European funds.

The growth of the economy, however, will be concentrated in the first half of the year, as happened in 2022. In fact, Funcas predicts that since June the Spanish economy will remain stagnant: GDP will grow by 0.4% in the first quarter, 0.3% in the second, only 0.1% in summer and 0% in the last quarter of the year. The reason for the stagnation since mid-year is in the "contractionary effect of monetary policy and financial tensions", which will begin to impact indebted families and companies thereafter.

Even so, Spain will manage in the course of this year to recover the level of GDP prior to the pandemic. " Spain is one of the three countries that has not yet closed that gap, along with the Czech Republic – which is even further away from its pre-covid level – and Germany. In the Czech Republic, pre-pandemic GDP will probably not recover this year, so Spain would not be the last EU country to recover that level," explained Raymond Torres, director of Economic Situation at Funcas.

The State will spend less in 2024 and will curb GDP

The improvement in growth in 2023 is offset by a worsening of the forecast for 2024, when GDP will grow by 1.4% and not 1.8%, as expected in January. The worsening is justified by two reasons: "domestic demand will be affected by contractionary elements", which will curb private consumption, and "fiscal policy can no longer be so expansionary, not only because of the level of imbalance, but because fiscal rules will be activated in a context of interest rate hikes", This will cause public consumption to grow by only 0.7% compared to the 2.2% growth forecast for 2023.

It refers to the European fiscal rules, suspended since the pandemic, but which are expected to be activated again next year, it is not yet known if with modifications. To date, these rules required that the public deficit of the member states be below 3% of GDP – otherwise, the country entered what is known as 'corrective arm' and its fiscal policy was closely monitored by the European authorities, in addition to being exposed to sanctions – and that public debt was reduced with the aim of converging around 60% of GDP.

Funcas warns that the deficit will close this year at 4.5% of GDP, an "unsustainable level that will become a problem from next year."

"In a context of rising interest rates and in which the ECB is no longer going to buy the debt issued by the states with the same intensity, it is inevitable that the cost of servicing the public debt that the Spanish State has will increase. This is what underlies our assessment that sustaining the deficit levels we have is going to be more expensive in the future than it is currently," said Carlos Ocaña, CEO of Funcas, who recalled that the Independent Authority for Fiscal Responsibility (AIReF) estimated the additional cost of interest on the debt at 0.4 points of GDP (about 5,200 million euros).

In his opinion, "the importance goes beyond the cost, because it will have to continue financing in the future and it is important that the State has credibility and acceptance in the markets, and that requires a credible plan to contain the deficit in a context in which the fiscal rules are going to return," he warned, in line with the repeated requests made by the AIReF or the Bank of Spain.

For 2024, the growth profile will be the opposite of this year, with a weaker first half of the year and vigorous growth from June. According to its forecasts, GDP will rebound by 0.2% between January and March -after two quarters of flat growth-, grow by 0.6% in the second, 0.7% in the third and 1% in the fourth quarter.

Processed foods, "the focus of inflation"

As for inflation, Funcas expects it to take time to dissipate. For this year, they forecast an average inflation of 4.3% and, for the next, 3.4%, although they warn that the most worrying thing is the core and, in particular, the price of processed foods, which is "the main focus of inflation".

"Inflation will continue to camp us, prices will continue to grow well above the ECB's target. By December of this year the inflation rate will stand at 5%, this high inflation has direct consequences: it supposes an impoverishment and lower purchasing capacity, and an indirect effect, because rates continue to have to be high, economic activity and the purchase of housing are reduced, "they warn.

  • GDP
  • Germany

According to the criteria of The Trust Project

Learn more