Spain Bank prepares economic forecasts deep cut for this year and 2022 as the Banco de España is preparing a "significant downward revision" of its growth forecasts for this year and, to a lesser extent, also for 2022.

This review is preceded by the INE review in the second quarter, the alert for supply chain bottlenecks and high energy prices, which may affect economic recovery.

In addition, the supervisory body will not publish new macroeconomic projections until December.

The governor of the Bank of Spain, Pablo Hernández de Cos, however, has already advanced that he will undertake a “significant” downward revision, as he indicated during his appearance before the Congressional Budget Committee on the draft General State Budget for 2022.

In this way, the agency joins the wave of reductions undertaken by organizations, such as the IMF or BBVA Research, as a result of the review by the INE of the growth of the second quarter, which reduced from 2.8% to 1.1%.

Spain Bank prepares economic forecasts deep cut

The Banco de España improved its forecasts in September to 6.3% this year and 5.9% in 2022, compared to the rates of 6.5% and 7% calculated by the Government, but has indicated that “they have become obsolete”.

The IMF cuts the growth forecasts of the Spanish economy for this year and improves those of 2022: inflation enters as main focus of attention

Hernández de Cos has pointed out that the Consensus Forecasts forecast panel, which has a monthly frequency, revised in mid-October down by 5 tenths, in the last month, its forecast of GDP growth this year, to 5.6%, and stands at 6.1% for 2022, after incorporating the latest events.

These could be levels close to those the agency would update its forecasts.

In any case, the president stressed again that the recovery in activity is still “clearly incomplete”, since the level of output in the second quarter still presented a gap of 8.4 percentage points compared to the observed at the end of 2019, although he highlighted the “positive trend” in employment.

Spain Bank prepares economic forecasts deep cut

Although the agency notes that the economy would have maintained a “remarkable dynamism” in the summer months, it will carry out a thorough review of its forecasts due to the downward revision of the INE and the “obstacle” to recovery posed by bottlenecks and high electricity prices.

The reduction from 2.8% to 1.1% of growth in the second quarter by the INE implies a “substantial” reduction in the average GDP growth rate for this year and, to a lesser extent, for 2022, according to the Bank of Spain.

Added to this is the impact of changes in global supply chains and higher costs of some intermediate goods used in production processes and, in particular, energy.

In Spain, the effect of misalignments on global supply chains has already resulted in a significant increase in the delivery times of industrial orders, and in some cases, in the need to reduce the pace of production.

This reduction in the pace of production comes as a result of the shortage of raw materials and intermediate consumption, especially the automotive industry, one of the most affected by the shortage of semiconductors on a global scale.

Spain Bank prepares economic forecasts deep cut

In addition, the Banco de España explains that the insufficient supply of some goods and services to meet demand has led to a “particularly sharp” price increase in the case of various industrial and transport metals.

This phenomenon has also occurred in energy sources, whether primary, such as oil, gas or coal, or secondary, such as electricity, produced in part by some of the primary sources.

“ This increase has moved to the final prices paid by households and businesses, which compresses their real incomes and therefore negatively affects the pace of recovery, " he warns.

Among the main factors of uncertainty, in addition to bottlenecks and the price of energy, the entity has cited the incidence of the pandemic by the rate of global vaccination, as well as factors related to the behavior of agents.

Decisive in the recovery will be the pace and extent of the process of spending the savings accumulated by households in pandemic, which is estimated at about 6 points of GDP, as well as the international movements of people and the speed of return of tourism, whose full recovery would not take place until 2023.

Spain Bank prepares economic forecasts deep cut

He has also stressed that the implementation of the Next Generation EU funds is “crucial”, since with an estimate that more than 11,000 million will be executed this year and 31,000 million in 2023 (contribution of 6 tenths and 1.8 points to GDP, respectively), he sees a “remarkable” uncertainty.

"Its execution is being more complex than we initially estimated,” he admitted.

Another factor refers to the final impact of the crisis on the productive fabric, since the end of public measures to support companies “could lead to new deterioration in business solvency”.

The last factor that could adversely alter Spain's economic prospects is the upturn in inflation, which the EDB attributes to the closure of certain productive activities as a way of containing the pandemic or the rise in prices following the pandemic, in addition to the rise in energy prices.

The internal estimates obtained at the Banco de España through different methodologies point to an impact of between 2 and 3 tenths of GDP after three years for a permanent increase of 10% in the price of electricity paid by consumers.

The budgets predict a growth of the deflator of private consumption of 1.3%, two tenths less than the projections of the Bank of Spain in September.

Today, according to Hernández de Cos, the average rates of variation of the harmonized index of consumer prices (HICP) in 2021 and 2022 would be revised upwards by just over 0.5 and 1 percentage points, respectively, to 2.8%, which has “consequences” for the economy, although it could be beneficial for the reduction of the public deficit.

# Spain Bank prepares economic forecasts deep cut #