Another uncertain and volatile year is expected for 2023, with a marked growth slowdown. Spain could weather the recession but still faces high risks. GDP will remain below 2019 levels, indicating that it remains in a convalescent state after three successive crises since 2008 and suffering imbalances still to be addressed.

Evolution of the principal macro magnitudes of the Spanish economy in 2022

At the beginning of the year, Metyis’ macroeconomic forecasts sent to the Spanish Economic Forecast Panel prepared by Funcas (among 20 participating institutions) indicated that Spain’s GDP growth would expand by 5.2% in 2022, virtually in line with the 5.5% recorded in 2021. This projection was reasonably accurate (GDP could close with an increase of 4.6%), especially when considering the events that emerged during the year, such as Russia's invasion of the EU's external border, the highest inflation recorded in decades or the aggressive response of monetary policy tightening by central banks.

The external environment was adverse, explained by the persistence of bottlenecks, the presence of dislocations in global supply chains, soaring commodity prices, and marked risks of energy shortages. However, these factors did not significantly affect Spain's economic growth in 2022, although they could weigh on next year. As illustrated in Table 1, exports may have grown by around 17% in 2022, 10 p.p. more than imports, generating half of GDP growth.

Within total exports, goods exports were hit hard (up just 1.4% year-on-year to Sep-22, according to National Accounts) due to a rapid deterioration in terms of trade. This has pushed the nominal trade deficit up to around €70 billion for 2022 (the highest in 12 years) due to energy imports at much higher prices and the depreciation of the euro against the dollar, the currency of payment for energy and non-energy raw materials. However, this was offset by exports of services (+86.2% to Sep-22), which have been boosted largely due to the dynamic recovery in tourism. Overall, Spain maintained the surplus in its external accounts, since large tourism inflows offset a larger trade deficit in the goods balance.

Meanwhile, growth was meeker in 2022 on the domestic demand side, despite notable gains in employment (around half a million new Social Security registrations). Private consumption, up to 6% in 2021, has moderated to approximately 2% in 2022 on the back of low levels of consumer confidence, the rise in prices and interest rates, and due to lower demand in 2020, which had already nearly recovered in 2021. Public consumption is about to stagnate in 2022 after falling considerably in the first three quarters.

Thus, the most dynamic item was investment, which could have grown by 5% in 2022, supported by the reduction in inventories, the pull from exports and the gradual deployment of European funds from the Next Generation European Union (NGEU) programme. Moreover, investment (unlike consumption) barely recovered in 2021 from the sharp contraction experienced in 2020. Hence, the contribution of new orders for machinery, capital goods and construction significantly impacted growth rates in 2022.

However, the most relevant and singular factor of the year now ending was inflation, which exhibited a sudden acceleration and persistence that was not adequately anticipated by the projections at the beginning of the year. Inflation averaged more than 8% in 2022, four times the ECB's statutory target. The price spiral has strongly eroded wages and household disposable income in real terms, with risks of second-round effects being reflected in the core CPI, which could, in turn, maintain adverse inertia for longer.

Accelerating inflation has prompted the ECB to react harshly: it halted net asset purchases (APP and PEPP programmes), tightened longer-term lending (TLTRO facility), created an instrument against disorderly developments in euro countries' risk premia (TPI mechanism), and raised benchmark interest rates by 250 basis points. Unfortunately, doubts remain as to whether these measures will be enough to bring inflation back to target, which according to ECB’s current forecasts, will not happen until 2026. Indeed, the Eurozone economy is projected to almost stagnate in 2023 amid persistent inflation pressures.

Prospects for Spain in 2023

Next year, GDP could ease to around 1% according to current Metyis projections (graph 1a). On a quarterly basis, Q1 could register a fall, but growth could then return to positive figures from Q2 onwards.

The strong performance of the external sector in 2022 will evaporate, with exports and imports showing lower growth rates of around 4% in 2023. This projection is due mainly to the cooling of foreign demand and the fact that tourism has already recovered to its pre-pandemic levels, so the scope for improvement is already limited. Nevertheless, the Current Account would still show a slight surplus (graph 1b).

Growth is expected to be underpinned by domestic demand. Investment could soften compared to the gains in 2022 but would still be more substantial than consumption. The projected rise of around 2% would occur off the back of an increased execution of projects financed with NGEU funds, which could generate a complementary effect on private investment.

Meanwhile, private consumption is expected to grow by 1%, weighed down by deficient consumer confidence levels, more restrictive financing supply and tighter financial conditions. Moreover, after the precautionary (and forced) rise in 2020, the household savings rate is down and already close to its long-term level, reducing the cushion against price, interest rate, and tax base rise, factors for which wage rises would not compensate.

Inflation will continue to point downwards as the ECB's measures take effect but will still double the 2% target (graph 2a). ECB rate hikes will make refinancing and new credit more expensive and tighten lending standards, weighing on consumption and investment. On the other hand, Spain would maintain a high fiscal deficit, close to 4%, making it difficult to reduce public debt (currently at 115% of GDP) to more comfortable levels (graph 2b).

Uncertainties and risks for 2023

The levels of uncertainty surrounding the macroeconomic projections remain very high. Some factors could improve economic performance, but others could worsen it. The latter are currently more likely to materialise and will have greater impacts, so the overall risk assessment is skewed to the downside, indicating that growth could be lower than projected (Table 2).

The prospects for raw materials supply and prices remain uncertain, especially energy. The future of the war and other geopolitical risks could continue to dislocate global financial and trade flows, as well as generate a further slowdown in international demand for goods and services produced in Spain.

On prices, there are risks of de-anchoring inflation expectations and second-round effects, which, if they materialise, would delay the return of inflation to 2% and force the ECB to tighten monetary policy further. In a very adverse scenario, a new outbreak of a sovereign crisis could even emerge in the euro area, with sovereign risk premia in some countries spiralling out of control. If this were to happen, financial stability risks and additional recessionary effects would emerge, as in 2012.

However, there could also be positive news, such as an acceleration in the execution of NGEU funds, a further easing of global supply shocks, continued employment dynamism or greater resilience than expected to price, and interest rate hikes on the part of firms and households.

Coda: the legacy of the crisis and remaining vulnerabilities

The legacy of the crises has been dramatic for the Spanish economy: GDP may not recover to its pre-pandemic level until 2024, two years later than in the eurozone as a whole. Moreover, Spain has recorded virtually no sustained growth in the last 15 years, domestic demand is still five points below 2008, and real per capita income has stagnated since 2005. This results from three consecutive crises: the global financial crisis in 2008-2009, the eurozone fiscal and sovereign debt crisis in 2011-2013 and the pandemic in 2020.

As illustrated in Table 3, some critical macro-financial vulnerabilities (soundness of the banking system, external deficits, private debt, and, in part, competitiveness gaps) have partly corrected in recent years. While others (productivity, sustainability of public accounts, external debt, adverse demographics, preponderance of small firms, climate change, etc.) have emerged or worsened, underlining the urgency of ambitious reforms, which are both necessary and long overdue.

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