Bank of Spain raises 2024 GDP growth forecast to 2.3% and raises inflation forecast to 3%

Bank of Spain raises 2024 GDP growth forecast to 2.3% and raises inflation forecast to 3%Efe

More growth in the Spanish economy, but also more inflation. That’s what Bank of Spain in updating your macroeconomic forecasts, published Tuesday. The organization, which Pablo Hernandez de Cos led until this Tuesday, now estimates that the Spanish economy, after growing by 2.5% in 2023, will grow. 2.3% in 2024 (up four tenths from the 1.9% it had already raised its forecast to in March) and maintains its forecasts at 1.9% and 1.7%. for 2025 and 2026. From my side, unemployment ratewhich was 12.2% in 2023, will continue its downward trend in the coming years, although it will remain above 11% in 2026.

In addition, inflation correction is expected to proceed a little slower. After recording average inflation of 3.4% in 2023, it is now expected that on average 3% by 2024 (compared to 2.7% expected in March). Consumer price index forecasts also rose – by a tenth – for 2025 and 2026up to 2% and 1.8% respectively.

The Bank of Spain’s new estimate of GDP growth of 2.3% by 2024 is more optimistic. optimistic than Government this year (2%) and close to the forecast of the International Monetary Fund (IMF), which just raised its forecast for the Spanish economy this year to 2.4%.

geopolitical tensionsepisodes of international financial turmoil or, at a domestic level, weak performance of European funds “Next Generation EU”

These are pointed out as some of the risks that could ultimately undermine the greater optimism that the Bank of Spain’s forecasts are now showing.

It can also cause this effect, budget adjustment plan for the period 2025-2028. which the government will have to present in September to comply with new EU budget rules. “Although the economic consequences of the said adjustment plan are uncertain and will depend critically on how it is designed, its implementation can be expected to entail less dynamic activity over the entire forecast horizon than is envisaged in this forecast,” admits the Bank of Spain. In April, the organization already estimated that the new fiscal rules would require an annual adjustment equivalent to 0.5% of GDP starting in 2025. However, for now, the forecasts released on Tuesday do not take into account the possible effect of slower growth in either 2025 or 2026.

Growth slowdown effect

In general terms, the Bank of Spain’s new macroeconomic picture for the Spanish economy follows the pattern of the European Central Bank’s (ECB) updated forecasts for the eurozone published last Thursday: more growth and more inflation.

According to the Spanish Quarterly Economic Report, published on Tuesday, the reasons for the upward revision of GDP growth in 2024 are primarily due to “drag effect” which is due to the greater thrust received in the last half of 2023 and the first quarter of this year.

Best Performance Eurozonethe most flexible financing conditions (by reducing interest rates), population growth, real income growth, inflation correction, private consumption growth and investment incentives related to European Next Generation EU Funds These are other circumstances that, according to the Bank of Spain, contribute to improving economic growth forecasts. They should all serve to counteract some possible burden, such as higher prices for energy prices Compared to what might have been expected in March, depletion international tourism or fading demand dammed demand goods and services from the health crisis.

Noting progress in 0.7% in the first quarter, The Bank of Spain forecasts interest rates at 0.5% in the second quarter (INE will publish a preview of this data on July 30). “This rate would be compatible with interannual GDP growth in the second quarter of 2.4%, the same as in the first quarter,” explains the Bank of Spain’s research service.

Disinflation process

In the case of inflation, the deterioration of the forecast for 2024 (to an average level of 3%) is due to the large contribution of both sides. energy component as of services. This trend is also observed on a global scale, where disinflation process continued in recent months, although at a slower pace than in 2023. All this makes the Bank of Spain “recommend very careful before considering the current inflationary episode subdued,” especially “in the context of the still noticeable increase remuneration per employeemodest achievements performanceobvious signs tension in the labor marketThere is noticeable dynamism in activity in the service sector, especially in tourist services“.

In any case, looking into the coming quarters, the downward path of food inflation and core inflation is expected to continue. In particular, food inflation will decline from an annual average of 11.1% in 2023 to 4.5% in 2024 and to around 2.5% in 2025 and 2026. months,” especially if the VAT reduction on some basic food products, in effect since January 2023, is withdrawn from July. If this is the case, VAT on some basic food products will return to 4% (from the current 0%) and that on other food products such as oilat the level of 10% (from the current 5%).

Government deficit above 3% of GDP

New prospects for the Bank of Spain slightly improve its forecasts for deficit of all public administrations, which now amount to 3.3% of GDP by 2024; 3.1% for 2025 and 3.2% for 2026. These rates improve on the previous estimate of 3.5% for each of the three years that the Bank of Spain predicted in March. However, these rates in all cases exceed the limit of 3% of GDP and lead the Spanish economy into crisis. Excessive Deficiency Procedure provided for by EU tax rules.

The budget assumptions of the new estimates include an expansion of transition income measures related to temporary levies on energy companies and financial institutions

until 2025, which, together with other smaller changes, represents a deficit reduction of 0.1 percentage point of GDP in 2025 and an increase of the same magnitude in 2026.

In addition, the effect of latest offers about the right to deduction by some mutualists personal income tax and the unconstitutionality of a number of provisions introduced by Royal Decree-Law 3/2016 concerning income tax. Together, the two court decisions are estimated to impose new spending obligations on the government, which could mean an increase in the deficit of about 0.2 points of GDP in 2024.