Thursday, August 11 2022

Spain’s GDP growth slowed in the first six months of 2022 compared to the second half of 2021. GDP growth in the first quarter of 2022 was +0.2% quarter on quarter and could have been of +0.6% in the second quarter (according to estimates by BBVA Research), well below the +2.6% and +2.2% QoQ of the third and fourth quarters of last year, respectively. Looking at the components of demand, the slowdown was broad based, although the decline in household consumption was particularly strong. However, the deceleration in the central time of the year will be smaller than expected three months ago, which will partly offset some of the headwinds looming on the horizon. In addition, disruptions in global value chains continue to limit the supply of certain goods, such as automobiles, sales of which have fallen by 50% since 2019.

According to BBVA Research, household spending has been hit hard by the rise in the prices of raw materials and intermediate goods, in particular fuel and electricity. In addition, the likelihood of a gas shortage in Europe has increased, leading to constant revisions to the outlook for gas costs. The new upward revision in gas prices could subtract an additional 0.1 to 0.2 pp from GDP growth in 2023. In addition, after a period of confinement between 2020 and the end of 2021, the increase in production costs has been more reflected in final prices, as companies perceive that the increase in input costs will be more durable than initially expected. . As a result, inflation continues to surprise on the upside and is no longer limited to a few components of the CPI. Core inflation, which encompasses 82% of the basket of household goods and services, could rise further to stand at almost 6% on average during the second half of the year.

On the other hand, households are not using the wealth amassed during confinement to consume at the expected rate. As a percentage of disposable income, savings remain around their historical average. Uncertainty about the future development of the economy and rising inflation may encourage households to postpone certain decisions, or even to encourage investment in residential real estate as a safe haven.

In their report, BBVA Research experts point out low productivity growth per worker. In recent months, social security enrollment has grown at rates that on other occasions have implied higher GDP growth rates. This may directly reflect increased job creation in some service sector activities, and the fact that unemployment is at its lowest level since September 2008. Another factor is the effect of labor reform, which led to a higher percentage of permanent contracts, can maintain job creation, but with a lower intensity of hours worked.

Despite the downward revision to expected GDP growth for 2023, economists at BBVA Research argue that, so far the recovery is holding and the momentum remains positive for the third quarter of this year. They expect the slowdown in activity to be limited and short-lived, thanks to several factors. First, despite the risks surrounding the economy, the wealth accumulated during the lockdown could support consumption in the coming quarters. This would help mitigate the impact of many of the headwinds described above or be used for home purchases. Secondly, the actual release of Next Generation EU (NGEU) funds may accelerate in the coming quarters. Finally, the positive effects of labor reform could contribute to supporting consumption, in particular of the younger generations, while promoting productivity. Hiring data suggests that regulatory changes are reducing the weight of temporary work, particularly among those under 25. Better job security could reduce the precautionary savings of this cohort of workers or stimulate their willingness to take on debt. Furthermore, a more stable employment relationship could increase incentives to invest in the human capital of newly hired workers.

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