The cold returns to the European economy. You just have to take a look at the condition of your locomotive. Germany is once again the sick man of Europe with a crisis that hits it on many fronts and that has revealed the frailties of its growth model: the energy and industrial crisis after the doping of cheap Russian gas was withdrawn; the difficulties of its export structure aggravated by the woes of China; a demographic deficit that leaves it without workers; the lack of infrastructure, private consumption and cutting-edge technology; the need for the automobile to adapt to green demands… Germany suffers, and Italy and Holland already fell in the second quarter. The deterioration of European industry is beginning to affect services. Furthermore, rate increases seek to tame inflation by stifling activity through an increase in the financial burden and restriction of credit and investment.
The risk of a recession on the horizon is palpable. However, the buoyant that can facilitate a soft landing is the extraordinary performance of the labor market. Although with fewer hours worked, employment still shows unusual strength. In a context of lack of labor and in the face of a slowdown considered temporary, the workforce is holding on at the expense of hours and productivity. “The moderation in activity for now has only translated into a reduction in vacancies, but not in layoffs,” says Rafael Doménech, economist at BBVA Research. As long as employment resists, consumption will be supported.
In the midst of this devilish scenario, the evolution of the Spanish economy is surprising. It grows at rates that double those of the rest. In the second quarter it shows a vigorous expansion of 0.5%, while the eurozone is looking towards contraction.
The question is how much Spain can endure without its trading partners dragging it down and the rates making a dent, adding to the heavy burden of accumulated inflation. There are many shocks in a row. The most recent figures show that the Spanish economy is also slowing down intensely. “Until now the foreign sector had supported us strongly, but there is, without a doubt, a downward trend in growth. It is nothing dramatic, in no case is a collapse seen at this point,” explains former minister Jordi Sevilla.
Employment slows down after a very strong first half of the year. Sales data from banks and the Tax Agency reveal declines since July. The updated indicators from both the Tax Authority and EsadeEcPol-EY show flat growth in the third quarter. And PMI business surveys project a slight contraction in activity after the summer. The Bank of Spain is more optimistic: it forecasts a 0.3% quarterly advance between July and September and weakness between October and December.
Inflation and rate increases are eroding the purchasing capacity of families, especially the most vulnerable. And the recent rise in oil prices revives concern about prices. Although this rebound is different: “It is far from that of 2022, other raw materials are not accompanying it and the recovery in profits can absorb it,” says Raymond Torres, from Funcas. Of course: the saving capacity is falling apart and investment in equipment is not working, partly due to the restriction of financing and despite the boost from European funds. It is worth considering whether to some extent these resources are being used to replace own investment and thus strengthen their finances, suggests Doménech.
The interest increases should also affect Spanish households more as they have more variable rate mortgages and their rates are updated. Exports have faltered since April. And tourism will moderate its growth once the recovery from Covid has run out and as inflation bites.
Public consumption skyrocketed with the pandemic and has continued to rise: it exceeds the 2019 level by 9%. This fiscal boost has helped protect income and may begin to be diluted in 2023 by once again subjecting itself to European fiscal discipline and withdrawing aid from the energy crisis.
Contractive forces are powerful. But even so, the Spanish economy shows signs of endurance. What explains this resistance? The labor market, the immigrant population, wage moderation, the energy situation, European funds and public spending may be behind it.
Until recently, part of the strength came from the magnificent performance of the foreign sector selling business services, goods and tourism that benefited from the post-pandemic recovery. In this sense, wage moderation may have been key. As Fedea researcher Miguel Ángel García points out, between 2019 and 2022 the salary per employee has fallen by 4.8% once inflation is subtracted. Although there has been a sharp rise in contributions and the minimum wage, labor costs have become more competitive in real terms, helping to sustain employment.
And this gain in competitiveness has been influenced by disinflation, which has arrived earlier in Spain: partly due to an electricity price system that very quickly transfers the falls and rises of the wholesale market to consumers. Partly due to the Iberian mechanism and the greater deployment of renewables. And partly because in Spain there were never fears of supply cuts. Thanks to the liquefied gas installations, prices have been cheaper than in the rest of Europe. All of this has generated a gain in the competitiveness of the Spanish industry. This has been detected by the Bank of Spain in the most energy-intensive sectors.
Another differentiating element has been the population. This has increased again as if it were bubble times due to the arrival of immigrants. In the last year and a half it has grown by 700,000 people, which means more workers, more consumption and, therefore, more growth. A third of the jobs created since the pandemic have been foreign: more than 450,000. They could represent between one and two points of GDP. The bulk comes from Latin America, so Spanish may end up being an advantage in making up for part of the enormous demographic and vacancy deficit despite high unemployment.
A healthier financial situation
Nor is it apparent for now that the rate hike is derailing the economy. This time it seems that Spanish families and companies are in better conditions to face them. A crucial milestone is that households have gone from being highly indebted to being net creditors. That is to say: they have more assets than debt and, therefore, the increase in rates hurts them less. There is also a higher proportion of fixed rate mortgages, especially among new ones that carry a greater debt load. As long as employment holds, it also allows families to cushion the rise in rates by increasing mortgage repayments and renegotiations, as is happening. Companies are also healthier and have liquidity due to the recovery of the surplus, European funds, ICOs and, perhaps, less investment.
The loss of purchasing power has occurred at the same time as there were considerable increases in the minimum wage and important public aid that has protected consumption. And not only has there been a large injection of public spending, for example with aid for the energy crisis and revaluing pensions, 23 billion European funds have also been released, which could represent up to two points of growth from 2021.
Activity should improve as wages rise and there is a partial recovery of purchasing power in a context of disinflation. The population and European funds will continue to give push. Still, uncertainty persists. “In these circumstances there is no reason for higher rates, a pause is needed to remove the risk of recession,” says Raymond Torres.
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