After a better-than-expected outturn in the first half of 2022, high energy costs and the worsening of the external environment point to a considerable slowdown. However, the Recovery and Resilience Plan will provide notable support to the economy, while the broad-based government support measures to mitigate the impact of high energy prices are set to partly cushion the impact of high inflation on businesses and on households’ real disposable income. These measures will continue until the end of 2023 without, however, hindering primary surpluses in the coming years.
Last update (forecast)
|GDP growth (%, yoy)||8,4||6,0||1,0||2,0|
|Inflation (%, yoy)||0,6||10,0||6,0||2,4|
|General government balance (% of GDP)||-7,5||-4,1||-1,8||-0,8|
|Gross public debt (% of GDP)||194,5||171,1||161,9||156,9|
|Current account balance (% of GDP)||-8,2||-8,6||-8,6||-8,1|
The economy proved robust in the face of intensifying headwinds
Despite rising inflationary pressures and a lingering energy crisis, the economy posted a solid growth rate of 7.8% over the first half of the year, compared to the same period last year. Growth was largely driven by private consumption and services exports due to a buoyant tourist season, while investment started to slow down already in the second quarter, amidst still favourable financing conditions for businesses. Goods exports continued growing, despite the challenging international environment. The labour market kept creating jobs but at a slower pace, with unemploymentrate declining to12.2%in August.
Expansion slows due to higher inflation
Economic activity is projected to slow down significantly from the second half of this year, partly mitigated by higher minimum wages and government support. Households are expected to adjust their consumption decisions to higher prices and the associated erosion of real incomes. Amid high uncertainty, tighter financing conditions, rising input costs and slowing demand, investment growth is likely to lose pace, but continues to be supported by the Recovery and Resilience Plan. Growth in goods exports is forecast to decelerate, in line with the projected slowdown of the European and global economies in the second half of 2022 and in 2023. Tourism, however, will remain robust, as the sector is expected to continue to record considerable gains from high-income source countries. Overall, real GDP growth is forecast at 6.0% in 2022 and 1.0% in 2023.
With the external environment slowly improving and inflation declining more strongly as of the second half of 2023, growth is expected to record a broad-based uptick towards the end of the same year and to provide a positive base effect going forward. For 2024 as a whole, growth is set to pick up moderately to 2.0%, driven by the gradual recovery of private consumption and improving external demand.
Wage growth to fall behind inflation
Weakening job creation, broadly in line with the projected deceleration of GDP growth, and the absence of the indexation of public wages and social benefits are expected to keep nominal wage growth below inflation. However, the latest increase in the minimum wage and government measures to mitigate the impact of high energy prices, as well as tax reductions that directly affect household income, are set to partially offset the drop in real wages. Inflation is forecast to peak in the last quarter of 2022 and to decline only gradually thereafter. Increasing energy prices are the main driver, but the pass-through to other components is set to gain pace. HICP inflation is projected to reach 10.0% in 2022 and to fall to 6.0% in 2023,before easing to 2.4% in 2024.
Downside risks surround the outlook. The fall in household incomes in many countries of origin of foreign tourists and the increased geopolitical tensions in the region could weigh on tourism.
Return to primary surpluses despite the crisis
The general government deficit is forecast to decrease from 7.5% of GDP in 2021 to 4.1% in 2022, mainly driven by the phasing out of pandemic-related measures and the economic recovery. The outcome could have been even better, had it not been for the measures implemented to mitigate the impact of high energy prices that mainly consist of subsidies to energy users and cuts to indirect taxes on transport services. Since spring 2022, the government has taken additional measures for households and businesses, increasing their fiscal impact in 2022 from the 1.1% of GDP estimated in spring to 2.3% of GDP.
The general government deficit is expected to narrow further to 1.8% of GDP in 2023, bringing the primary balance to a surplus of 1.1% of GDP. Apart from the energy support measures planned for 2023, the forecast factors in a package of new permanent measures announced by the government in September, with an estimated fiscal cost of 0.4% of GDP in 2023. The package includes permanent tax cuts, most notably the abolition of the solidarity surcharge to public sector employees and pensioners, and measures on the public sector wage bill. The decrease of the fiscal deficit can be mainly attributed to the reduction in the fiscal cost of the measures to mitigate the impact of high energy prices (net of new taxes on windfall profits of energy producers) from 2.3% of GDP in 2022 to 0.5% in 2023 and to economic growth.
The general government deficit is forecast to decrease further to 0.8% of GDP in 2024, which corresponds to a primary surplus of 2.2%. As the economic recovery continues, and the negative output gap narrows, the primary balance is forecast to improve due to the cyclical component. Beyond that, the forecast assumes that the energy measures would be phased out by 2024, which contributes to the improvement of the primary balance.
Public debt is expected to decrease further to 171.1% of GDP in 2022, 161.9% in 2023 and 156.9% in 2024 supported by the increase in nominal GDP in all years and lower deficits in 2023 and 2024.
Fiscal risks remain, stemming from pending legal cases, most notably the litigation cases against the Public Real Estate Company.