Economy and crisis

Resilience or a need to catch up?

In Spain, too, the economy was in a post-Covid upswing before the outbreak of the Ukraine war. While the growth forecast for the current year is still 4.1%, the OECD is predicting only 2.2% for 2023. At first glance, the economy is therefore in a better position than Germany, where a recession can now be considered a certainty. On the one hand, this is due to the lower energy dependency of the service-driven economy (tourism), and on the other hand, the elasticity of exports, i.e., the change in demand depending on price developments, is lower in the current situation. In addition, however, Spain was hit particularly hard by the economic aftermath of the Covid crisis, so that the uptick in demand is currently determining economic development to an even greater extent than elsewhere.

The reasons for the decline in growth prospects in Spain are also the rampant uncertainty, high inflation rates and a fall in exports. However, the continued positive outlook for the tourism sector in the coming year and the strengthening of domestic demand, among other things as a result of the Spanish government's fiscal packages and the absorption of EU Next Generation funds, mean that the unemployment rate is unlikely to move upwards. A moderate increase from 13.6% to 13.9% is currently expected.

The inflation rate in Spain is currently 9.1%, and is still forecast at 5% for 2023. This is a much sharper decline than in Germany, where 7.5% is still expected. The main reason for this is energy prices, as core inflation (i.e., the increase in prices excluding energy and food) will be identical in both countries at around 4% in the coming year. Legislators in Spain have also adopted several measures to combat inflation and ease the burden on the population and businesses. For example, rental contracts in Spain are normally adjusted annually for inflation; currently only a 2% increase per year is permitted. Fuel has been subsidized at times, schoolchildren and students over 16 receive a special payment of EUR 100 from September to December of the current year, and public transportation is free for frequent users during these months. The gas price cap, which has been the subject of heated debate in Europe, has been in effect in Spain in part since May - it applies to gas used to generate electricity (which comes primarily from Algeria) in order to ease the burden on end consumers.

An excess profits tax was introduced for power generators and the banking sector to proportionately counter-finance the measures - large banks will pay 4.8% more tax on interest profits and fees, and large energy companies will pay 1.2% more sales tax in the current and coming year. This additional tax has led to criticism of the left-wing government of Prime Minister Pedro Sánchez by the opposition in Spain and is thus not an uncontroversial instrument in this country either. The banking association and business associations see particular risks for lending and competitiveness in the European region.

In summary, it can be said that crisis-tested Spain is still coming through the current crisis relatively unscathed. However, there are still considerable risks. In addition to the geopolitical situation, the interest rate environment could have a severe impact on overall economic development. Mortgage costs in Spain, which has traditionally focused on home ownership, and the cost of borrowing for the domestic economy are at the forefront here.

David Henneberger is Project Director of the Friedrich Naumann Foundation for Freedom in Spain, Italy, Portugal and Mediterranean Dialogue.