Bank of Spain Revises Economic Forecasts Amid Mixed Signals
The Bank of Spain has upgraded its economic growth forecast for 2024 from 2.3% to 2.8%, fueled by a positive revision of GDP growth in recent quarters and a strong contribution from exports. Simultaneously, it has lowered its average inflation forecast slightly to 2.9%. This updated outlook was detailed in the bank’s quarterly economic report published on Tuesday.
According to the report, newly available statistical information on national accounts contributed 0.4 percentage points to the upward revision of economic growth expectations for this year, while improvements in external demand added the remaining 0.1 percentage points. Notably, the increase in tourist exports has slowed less than previously anticipated, and imports have also remained relatively low due to decreased energy dependence.
For the third quarter, the Bank of Spain anticipates economic growth of 0.6%, which is two-tenths lower than the previous quarter. This moderate growth is attributed to a slowdown in employment dynamics and weakening corporate sales.
Looking ahead, the bank’s revised macroeconomic projections suggest a decline in growth over the next two years, primarily due to lower contributions from the external sector as tourism is expected to cool. However, the growth forecast for 2025 has been increased by three-tenths to 2.2% and by two-tenths for 2026 to 1.9%. The primary driver of GDP growth through 2026 is projected to be private consumption, supported by improvements in employment, wages, and inflation, alongside rising family confidence.
Investment is also poised to have a more significant role in GDP growth, although recovery in this area is expected to lag behind pre-pandemic levels. Many companies have delayed investment decisions, allowing them to strengthen their financial positions. This healthier financial status, coupled with the injection of European funds and better financing conditions, is expected to foster an investment recovery.
Inflation is forecasted to decrease to 2.9% in 2024, 2.1% in 2025, and 1.8% in 2026, largely driven by a gradual reduction in food inflation. Enhanced agricultural productivity is anticipated to alleviate inflationary pressures. However, the bank cautions that there will be a partial reversal of VAT reductions on certain foods in October, which will be eliminated altogether in January.
Underlying inflation, which excludes energy and unprocessed foods, is expected to average 2.8% in 2024, 2.2% in 2025, and 1.9% in 2026, driven by reduced demand and production costs. Nevertheless, the anticipated removal of public transport discounts in 2025 may exert upward pressure on the underlying inflation rate.
The unemployment rate is projected to remain steady, with the bank holding its 2024 forecast at 11.5%. Unemployment is expected to decrease to 11% in 2025 and 10.7% in 2026. The reduction in unemployment is limited by the projected slowdown in job creation amid rising active population figures, influenced by relatively high immigration rates. The Bank of Spain highlights that the aging of the workforce and challenges in matching workers with job opportunities are critical factors in addressing unemployment.
Long-term unemployment is a pressing issue, with approximately 1.1 million individuals unemployed for an extended period, constituting 40% of the total unemployment figure. This emphasizes that a significant proportion of the unemployed are structurally disadvantaged, making it difficult to lower their numbers simply through economic growth.
Finally, the public deficit is anticipated to contract to 3.3% of GDP in 2024, before slightly reducing to 3.1% in 2025 and 3.2% in 2026. However, public debt is projected to rise to 106.3% of GDP by 2026. The Bank of Spain notes that new fiscal rules will require a budget adjustment of 0.5 percentage points of GDP annually, adding another layer of complexity to the economic landscape.
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