Oriol Aspachs (Caixabank Research) The environment is undoubtedly complex and globally adverse. However, the Spanish economy weathered it better than expected during the first half of the year. It maintained growth that was by no means negligible and, above all, it surprised by accelerating the pace of job creation. The latest revision by the INE (National Statistics Institute) of its historical series has reaffirmed this positive assessment, with figures that are somewhat better than initially estimated. This leads us to revise the growth forecast for the year as a whole slightly upwards to 2.4%.
However, available indicators for the second half of the year are changing tone. The impact of the adverse environment is finally starting to be felt. The signs are manifold. From the slower pace of job creation to the deterioration in business confidence or the slowdown in household consumption. But it is equally important to point out that the pace of progress, although it has weakened, is still positive to date.
Everything suggests that this weakness will persist during the final part of the year and the first few months of 2024, but without causing a recessionary situation. The first step for the Spanish economy to start to regain some momentum will be conditioned by the course of inflation and can be taken when there are convincing signs that underlying pressures are fading, both in Spain and in the euro area as a whole. The next step will have to come from the ECB, when it picks up the gauntlet and starts to allow a loosening of financial conditions. We expect this to happen in the second half of next year. Somewhat later than initially expected, which is why we have revised the Spanish GDP growth forecast for 2024 slightly downwards to 1.4%, a figure heavily conditioned by the drag from the weakness at the end of this year.
Given that the environment is very complex, the uncertainty surrounding this forecast is high. As regards inflation, the risks of it being higher than expected have increased due to the drought, which puts upward pressure on the price of several foodstuffs, and also because of the rebound in oil prices. If these tensions persist, the improvement in economic activity will take longer to materialise. On the other hand, however, it is worth noting that the latest data published by the INE on household income and savings have been better than expected. The sharp upswing in the savings rate in Q2 2023 is particularly noteworthy due to its magnitude – it rose to 10.2% of households’ gross disposable income (1.7 p.p. above the figure for Q1) – and because it comes at a time of high growth in household income (12.2% year-on-year). This puts households as a whole in a less stressed financial position than expected, so consumption could behave somewhat more dynamically than currently envisaged in our scenario.
The path of fiscal policy will also be key. Now that financial conditions are tighter, investors’ sensitivity to the fiscal stance of individual countries could increase. The entry into force of new European fiscal rules next year could also bring the health of public finances back into focus. For the time being, Spain’s risk premium remains stable at around 110 bps. In contrast, over the last few months, the Italian risk premium has risen by almost 50 bps, while the Portuguese risk premium has taken the opposite path and has fallen by 25 bps since the beginning of the year. These changes do not only penalise or benefit each country’s treasuries. Interest rates on government bonds also have a major impact on the conditions under which their companies can be financed. In the current context, taking one path or the other is particularly relevant.
