The governor of the Bank of Spain, Pablo Hernández de Cos, advanced two weeks ago that they were probably going to revise this year’s growth forecast upwards, and today the forecast has come true. The Bank of Spain places the increase in GDP for 2023 at 1.6%, which is three tenths above its December forecast.
With regard to inflation, these calculations place it this year at 3.7%, that is, 1.2 points below the previous forecast of the Bank of Spain itself. On the other hand, food and the underlying one find it more difficult to moderate. Food prices have not yet reached their peak, according to calculations by the Bank of Spain, which put their average growth this year at 12.2%. It is an increase of more than four points compared to the December forecasts. Moderation will have to wait until 2024, when food rises 4.6%.
As far as growth is concerned, it will be a very modest start to the year, of only three tenths in the first quarter, to gain strength from spring on. This dynamism will be achieved by the reduction of inflationary pressures, the end of bottlenecks in supply chains and the intensification of the deployment of European funds.
These are elements that play in favor. On the other hand, this growth will be slowed down by the potential worsening of financial conditions as well as the transfer to credit of the increase in interest rates. In addition, it must be taken into account that these macroeconomic projections by the Bank of Spain were finalized before the banking storm broke out with effects still to be determined.
In this way, the Spanish economy will be able to recover the pre-pandemic GDP level in the second half of this year.
The Bank of Spain also considers that job creation will continue throughout the year, in accordance with the progress of activity. This increase in employment will make it possible to reduce unemployment, despite the fact that there is an increase in the active population.
With regard to inflation, the general would remain at 3.7%, that is to say, 1.2 points below the previous forecast. A downward revision that is largely explained by cheaper energy, helped by the base effect when comparing the rate with the high rates registered in the first months of 2022. In this way, it would be possible to go from stratospheric 8, 3% in 2022 to 3.7% this year.
On the other hand, what the Bank of Spain reviews in the opposite direction is both food inflation and core inflation, which does not take into account energy or food, and shows the more fundamental trend. In this way, it is estimated that the underlying average for 2023 will be 3.9%, half a point more than the estimate in December.
More spectacular is the upward correction of the forecast for food prices, reaching an average of 12.2 this year. This reflects the gradual transfer to prices of the costs that producers have had recently. This is the case of a raw material such as cereals, which has been transferred throughout the entire value chain, first to the industrial prices of products made with cereals such as flour and later to the consumer prices of bread and cereals.
The Bank of Spain estimates that the high subjacent inflation is an indication that companies are still passing on to their sales prices a part of past cost increases. On the other hand, wages continue to register moderate increases in the first months of 2023, with a wage increase in current collective agreements of 2.9%. It is true, however, that the agreements signed in January and February of this year mark an increase of 5.2%.
Financial conditions are also expected to continue to tighten in the coming months and there will be a decline in the demand for credit, while household consumption will remain very weak. Although there may be an improvement in this consumption compared to the end of 2022, it continues to be penalized by inflation, the tightening of financial conditions and the lower savings cushion available.
