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Funcas foresees a «sharp slowdown» in the economy after the summer


Funcas said this Monday that he foresees a «sharp slowdown» in the economy after the summer. Geopolitical tensions, the energy crisis and the change in direction of monetary policy due to the risk of chronic inflation cloud the outlook for the world economy in general and for the Spanish economy in particular. Thus, he estimates Spanish GDP growth of 4.2% this year and a «sharp slowdown» to 2% in 2023.

As Carlos Ocaña, general director of Funcas, and Raymond Torres, director of Situation of Funcas, pointed out this Monday in the update of the economic forecasts for Spain 2022-2023, these figures are subject to great uncertainty and conditioned by factors such as the duration of the war in Ukraine or the evolution of energy prices. Despite everything, the Spanish economy will grow above the European average throughout the forecast period.

The expected GDP growth of 4.2% this year does not vary with respect to the previous estimate, but the composition does. Domestic demand will only contribute 2.1 points, 1.7 points less than in the March forecast. This cut mainly reflects the loss of purchasing power of consumers due to inflation. Households will draw on savings to finance their spending, which will allow a slight growth in private consumption –a forecast that is down in relation to March-.

For its part, the contribution of the foreign sector has been revised upwards, up to 2.1 points (1.7 more than in March), as a consequence of the recovery of income from tourism to the level prior to the pandemic and, in to a lesser extent, sales of non-tourist goods and services abroad.

This rebound in tourism, the dynamism of exports of non-tourist goods and services and the strength of the labor market will continue to support activity in the coming months. However, they will run out of steam after the summer, while geopolitical, energy and currency shocks will gain weight.

Consequently, the Spanish economy will register a sharp slowdown in 2023, with GDP growth of 2%, 1.3 points less than in the previous forecast. Carlos Ocaña has insisted that “these forecasts are very sensitive to the evolution of inflation and interest rates; a higher inflation or a faster adjustment of interest rates would result in lower growth, a more adverse scenario that cannot be ruled out”. “The options for governments to reduce inflation are very limited, but economic policy must, at least, not aggravate the negative consequences of rising prices. A sensible income policy is needed, one that does not deteriorate the competitiveness of the economy. And prudent budget policy is needed that does not magnify the inevitable rise in the cost of our high public debt,” he added.

As for inflation, the consumption deflator will grow by 8.8% this year and 5% next year, based on the hypothesis of rising energy prices until next spring before stabilizing, in line with the energy markets futures. These forecasts incorporate some of the measures of the Government’s latest anti-inflation plan.

The dynamism of the labor market will continue, although at a slower pace, in line with the sharp slowdown in the economy. Until the end of 2023, around 600,000 jobs will be created, bringing the unemployment rate down to 12%.

The public deficit will fall this year due to the game of automatic stabilizers and inflation. However, in 2023 little progress will be made in containing the imbalances due to the cooling of the economy, the revaluation of civil servants and the indexation of some budget items such as pensions. The hole will be around 4.5% of GDP in 2023, a value close to its structural level, and the debt 112%.

Raymond Torres has pointed out that “the perpetuation of the armed conflict or its extension to other countries would inevitably lead to stagflation”. Another of the great risks concerns the evolution of monetary policy. The forecasts contemplate moderate increases in interest rates, which should be gradual so as not to intensify the slowdown and be accompanied by a firewall against financial fragmentation. All in all, the deposit facility would rise to 1.5% at the end of 2023, which would be consistent with a Euribor above that threshold and a yield on the 10-year bond close to 3%.

In Torres’ opinion, “this scenario will raise the financial burdens for households and companies, but to acceptable levels compared to the financial crisis. However, in the case of the public sector, the expected tightening of monetary policy will have a more pronounced impact, due to the starting level of the imbalances. However, it would still be a sustainable position as long as economic growth is maintained and a credible path of gradual correction of deficits is set in motion”.


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