Following strong growth in 2022, the economic expansion in Spain is forecast to decelerate in 2023 amidst the disruptions created by Russia’s war of aggression against Ukraine. Headline inflation peaked in July and is set to gradually decline going forward. Despite strong revenue performances, the general government deficit remains above 3% throughout the forecast horizon.
Last update (forecast)
|GDP growth (%, yoy)||5,5||4,5||1,0||2,0|
|Inflation (%, yoy)||3,0||8,5||4,8||2,3|
|General government balance (% of GDP)||-6,9||-4,6||-4,3||-3,6|
|Gross public debt (% of GDP)||118,3||114,0||112,5||112,1|
|Current account balance (% of GDP)||1,0||0,9||0,8||1,2|
Economic growth is expected to slow down as of mid-2022
Real GDP contracted marginally in the first quarter of 2022 before rebounding strongly in the second quarter underpinned by the recovery of tourism activity. Activity slowed down steeply in the third quarter and is expected to decelerate further in the remainder for the year. This downward trajectory is due to the deterioration of global growth prospects, resulting in reduced confidence of economic agents, and to prolonged pressure on prices, adversely impacting demand. Overall, the rebound of tourism throughout the year, coupled with government measures to mitigate the impact of high energy prices and the continued resilience of the labour market, are expected to help Spain to partly weather the increased headwinds stemming from the uncertain geopolitical context. As a result, the economy is set grow by 4.5% in 2022.
GDP growth is set to remain subdued in the beginning of 2023 before regaining vigour in the second half of the year. Pressures stemming from high energy prices are expected to partially ease from mid-2023, enabling a gradual pick-up in activity on the back of the moderate revival of private consumption and a further normalisation of tourism. In addition, the implementation of the reforms and investments under the Recovery and Resilience Plan are expected to lead to an increased dynamism in aggregate demand. Taking all these factors into account, and considering the low carry-over effect from 2022, GDP growth in 2023 is forecast to reach 1.0%. The expansion is projected to be more robust in 2024 also on the back of invigorated domestic and external demand, including a stronger contribution of investment compared to 2023, and GDP is therefore set to expand by 2.0%.
Strong labour market amid wage pressures
The labour market remained resilient during the pandemic. The unemployment rate is set to remain stable between 2022 and 2023 (at 12.7%) before posting a marginal decline to 12.6% in 2024. Wage growth is set to pick up at the end of this year and in 2023 but at a slower pace than prices, resulting in further losses in households’ purchasing power. In 2024 part of the lost purchasing power is set to be recovered thanks to wages set to grow above inflation.
Inflation to remain high in the medium-term
Headline inflation peaked at 10.8% y-o-y in July, on the back of a strong increase in energy and food prices, before declining to 7.3% in October. As a whole, it is projected to reach 8.5% y-o-y in 2022. In 2023, the expected progressive moderation of energy prices and the cooling down of demand are projected to reduce inflation to 4.8%. Furthermore, the impact of government measures to mitigate the impact of high energy prices, notably the VAT reduction on gas and the cap on wholesale gas price, is set to reduce inflationary pressure in the first quarters of next year. For 2024, HICP is projected to decrease to 2.3%. The pass-through from energy and food prices to other goods and services has become increasingly visible in 2022 and will prompt core inflation to remain elevated over the forecast horizon. Upside risks resulting from a more rapid wage adjustment could feed into higher core inflation over the forecast horizon.
Tax revenues keep a strong momentum, but the deficit reduction is set to decelerate
In 2022, the government approved several sets of measures to mitigate the impact of high energy prices that overall amounted to 1.6% of GDP. Some of these measures, including the reductions of VAT on electricity and gas, the exemption from the tax on the value of electricity production or the reduction of the special tax on electricity, are set to reduce government revenue. Others, such as the 20 cent per litre fuel rebate, the social heating voucher or several subsidies to low-income households and to the economic sectors hardest hit by the energy crisis, are projected to increase expenditure.
Despite these sets of measures, Spain’s headline deficit keeps reducing, driven by strong revenue growth. All the main taxation figures are expected to record a double-digit growth in 2022. Positive labour market developments, robust corporate profits and high inflation are among the main drivers. Additionally, the withdrawal of most pandemic related measures is expected to contribute to reducing the general government deficit that is set to decrease from 6.9% of GDP in 2021 to 4.6% of GDP in 2022.
In 2023, the general government deficit is projected to narrow further, but more gradually, reflecting the weaker macroeconomic scenario. Revenue growth is expected to moderate, but the overall level in terms of GDP is projected to remain around 4pps. higher than in 2019, even though the pre-pandemic GDP level is set to be reached only in 2024. Some structural factors are behind these developments on the revenue side, such as income support policies, changes in consumption patterns entailing more electronic payments and a possible decrease in the capacity to engage in tax avoidance. On the expenditure side, the phasing out of some energy measures is set to reduce the deficit, but the relinking of pensions to inflation is expected to weigh considerably on the 2023 government budget (estimated cost of 1.4% of GDP). The public deficit is projected to decrease to 4.3% of GDP in 2023.
In 2024, the general government deficit is forecast to decrease to 3.6% of GDP favoured by higher economic growth. Public debt is projected to gradually decrease from 114.0% of GDP in 2022 to 112.1% in 2024, driven by nominal GDP.