OECD Economic Outlook, Volume 2022 Issue 2

Spain

Activity is projected to grow by 1.3% in 2023 and 1.7% in 2024, after increasing by 4.7% in 2022. High inflation will curb household purchasing power, but savings accumulated during the pandemic will support consumption. With deteriorating demand prospects and rising financing costs, private investment is expected to remain subdued. The slowdown in key trading partners will dent exports. Inflation will peak at 8.6% in 2022 and then decline to 4.8% in 2023 and 2024.

Fiscal measures aimed at sheltering households and firms from the rise in energy prices will need to be reviewed periodically to ensure they are warranted, targeted towards the most exposed and compatible with fiscal and environmental policy targets. A timely and effective use of Next Generation EU funds will be key to support investment, boost long-term productivity and achieve the green transition.

Signs of a slowdown are accumulating

Economic growth slowed in the third quarter of 2022, with GDP rising by 0.2% after 1.5% in the second quarter. Consumer confidence fell to very low levels, close to those reached in the beginning of the pandemic. The unemployment rate rose to 12.7% in the third quarter after 12.5% in the second. Although it receded from a peak at 10.7% in July 2022, inflation remains high, standing at 7.3% in October, and core inflation reached 4.8% in September. The wage rate increased by 3.3% between the third quarter of 2021 and the same quarter of 2022. The government has agreed to raise the salary of public workers by a total of at least 8% and up to 9.5% (depending on the evolution of inflation and GDP) cumulated over 2022, 2023 and 2024.

Spain

Source: Instituto Nacional de Estadistíca; Eurostat; and OECD Economic Outlook 112 database.

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Spain: Demand, output and prices

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The government has implemented two successive sets of fiscal measures to attenuate the impact of the rise in prices. The first one, effective from April to June 2022, and estimated to cost EUR 6 billion (0.5% of annual GDP), included tax rebates and direct aid to firms and households, notably a rebate on motor fuels. The second one, covering the second half of 2022, amounts to around EUR 9 billion (0.7% of GDP), of which EUR 5.5 billion are spending measures and EUR 3.6 billion are tax cuts (extending those in the first package and a new cut in the VAT rate on electricity from 10% to 5%). Furthermore, in June, the European Commission approved public aid worth EUR 6.3 billion, effective until May 2023, in direct grants to electricity producers (the so-called “Iberian exception”). Finally, the VAT rate on gas was reduced from 21% to 5% from October until December 2022 and the government announced in October new measures worth EUR 3 billion, including regulated gas prices for collective residential heating systems until the end of 2023, and new subsidies on low-income households’ heating and electricity bills.

Fiscal support will be adjusted

The general government deficit is expected to decline to 4.2% of GDP in 2023 and 3.7% in 2024, after 4.9% in 2022. The draft budget for 2023 features a 10.5% rise in social spending and a 25% rise in defence spending. Pensions will be raised by around 8.5%. New tax measures, targeting firms and higher-income households, are expected to increase tax collection by EUR 3.1 billion cumulated over 2023 and 2024. No new measure to cushion the impact of Russia’s war of aggression against Ukraine was included in the draft budget but the current support measures will be assessed at the end of the year. In the projections, it is assumed that direct aid will not be renewed in 2023 and that tax rebates will be maintained in 2023 and gradually removed in January and July 2024. Under these assumptions, the fiscal stance would be tightened by 1.2% of GDP in 2023 and 0.5% in 2024.

Growth will slow

Growth is expected to slow in 2023 and remain moderate in 2024, mainly due to the depressing effect of inflation on household purchasing power and weaker in foreign demand prospects. The rise in euro area interest rates will weigh on business investment, while public investment is expected to remain dynamic thanks to the support from Next Generation EU funds. Increasing interest rates will also hamper consumption and housing investment, although the impact is expected to be more moderate than in previous periods of rising rates, as the share of floating-rate housing loans has fallen considerably over the last decade, to less than 75%. Under the assumption of a stabilisation in energy import prices, inflation would recede in the course of 2023, but remain high. The main risks surrounding the projection are related to the impact on activity from the EU plans to lower energy consumption and to the evolution of the war in Ukraine, although Spain is likely to be less affected than a majority of the EU countries by gas shortages, as it is less dependent on Russian gas imports. A swifter use of European funds would hasten the recovery.

Measures to cushion inflation should not jeopardise the green transition

An agreement with social partners to share the burden of the rise in import prices will mitigate the risk of a wage-price spiral. Fiscal measures to alleviate this burden must be temporary, targeted towards those most in need, be balanced with the necessary medium-term fiscal consolidation, and maintain incentives for energy savings. The latter will require the introduction of an efficient regulatory framework and adequate incentives to foster private investment in green technologies.