Returning to controlled inflation, the main economic challenge for 2023

By: News Team

Published on:

Spanish inflation slows down and closes 2022 at 5.7%

The return to more moderate levels of inflation will continue to be the main economic challenge in 2023, in addition to ensuring that the high price level does not prevent sufficient economic growth to maintain the good evolution of employment, although everything points to a significant slowdown in the Spanish economy.

1. GROWTH

The economy started the year with the forecast of fully recovering from the pandemic but the outbreak of war in Ukraine aggravated the increase in energy prices that had begun the previous summer, which has ended up slowing GDP growth in the second half of the year.

For 2023, there remains high uncertainty about the evolution of prices, interest rates and consumption, which will reduce economic growth at a rate closer to 1% than 2%, according to the consensus of analysts, although the Government maintains its forecast that it will reach 2.1%.

2. INFLATION

After peaking at 10.8% in July, the headline inflation rate has begun a path of moderation thanks to the stabilisation of energy prices.

The challenge is to maintain this downward path in 2023 without the withdrawal of the Government’s support measures causing a rebound effect in 2024, as the Bank of Spain has warned.

3. UNDERLYING

In 2023 the focus will be on the underlying rate of inflation, which excludes energy and fresh food, which is expected to exceed the general rate and de-escalate more slowly, because the rise in energy has not yet had an impact on the entire value chain and on the entire productive fabric, as the director of Economic Outlook at Funcas recalls. Raymond Torres, in statements to EFE.

4. FOOD

Faced with the moderation of the energy component of inflation, food still continues to register record increases, exceeding 25% in products such as oil, milk, eggs, yogurt, flour or sugar.

In this area, the Government plans to act with the anti-crisis measures that it will approve this week and that the experts consulted believe should be aimed at compensating with direct aid to lower-income households, instead of with VAT reductions or controlled prices, unless they are voluntary references.

5. INTEREST RATES

The strict monetary policy of the European Central Bank (ECB) has contributed to the moderation of inflation, which in return has the rise in variable-rate mortgages, the majority in Spain, with an increase in the monthly payment of around 40% for an average mortgage loan.

The economist and professor at the University of Alcal√° Daniel Fuentes predicts that the ceiling of interest rates will be around 3.5 and 4%, compared to 2.5% today, depending on how inflation evolves and the effect that more restrictive financial conditions have on the European economy.

6. WORK

The good performance of the labour market has been the surprise with respect to a historical behavior in which the crises immediately translated into large increases in the unemployment rate, as happened with the case in 2008.

Fuentes assures that the indicators point to maintaining the strength of employment even in a recessionary context, while Torres predicts an inevitable slowdown in job creation associated with the weakening of the economy and recalls that the challenge pending for decades is that of active employment policies.

7. WAGES

Wages accumulate a 7% loss of purchasing power in two years, recalls Torres, who sees it important to recover part of the purchasing power but avoiding direct indiciation to inflation, a scenario that he does not foresee because he calculates that the wage increase in agreement will be around 4% next year.

Fuentes believes that there is still room for an income pact that distributes the cost of inflation between wages and business margins, and that so far it has not been possible in the field of collective bargaining.

8. EUROPEAN FUNDS

Once the pace of execution has accelerated, the challenge in 2023 will be rather qualitative, so that these resources serve to transform the productive model, says Torres.

The Government has executed more than 38,000 million euros between transfers and calls in which 22,000 million have been resolved, of which 18,700 million correspond to calls of the State and 3,400 million, of autonomous communities, with more than 136,000 beneficiary projects throughout the territory.

9. ENERGY

The Government and the autonomous communities face the challenge of unlocking before January 25 the nearly 100 gigawatts (GW) renewables that already have access to the grid, but that before that date need to obtain the Environmental Impact Statement (DIA).

To this is added the limited success of the last renewable auction, in which only 1.5% of the capacity offered was awarded, due to the fact that the offers of the companies have been conditioned by the current situation, marked by the war in Ukraine, electricity market prices and inflation.

Likewise, it is also expected that the new regulated electricity tariff will also enter into force at the beginning of 2023, which will progressively reduce its link to the daily evolution of the wholesale electricity market, whose reform Spain will negotiate in Brussels in the coming months.

10. BUSTIBLES AND GAS

Although in recent weeks both gasoline and diesel are marking the lowest prices of the whole year, it remains to be seen if the evolution of the price of raw, closely linked to the evolution of the war in Ukraine, does not cause the Government to recover later the fuel bonus of 20 cents per liter that it plans to eliminate from January 1.

Regarding gas, until May 31 the “Iberian mechanism” will be in force, which limits the price of gas for electricity generation, and which has managed to contain about 15% the price of electricity since it came into force six months ago.

Leave a Comment