Inflation is still far from moderating and overshadows the momentum of the economy

In George Orwell's 1984, an army of civil servants corrected and remade the newspaper library as appropriate, so that there were no mistakes and everything made sense.

NewsEditor
NewsEditor
29 July 2022 Friday 23:52
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Inflation is still far from moderating and overshadows the momentum of the economy

In George Orwell's 1984, an army of civil servants corrected and remade the newspaper library as appropriate, so that there were no mistakes and everything made sense. If they had to check headlines for Spanish inflation, they would have extra work. Month after month peaks are broken and headlines expire.

Every time you have to go back further in time to find levels similar to those of these days. You have to look back 38 years, to that distant 1984, the real one. The data revealed by the INE indicates that in July prices rose by 10.8% year-on-year, six tenths more than the figure for the previous month. There is no truce in the midst of strong summer consumption – the party of spending prior to the storm clouds, many warn –, with half the country traveling and the other half full of foreign visitors, boosting tourist prices.

The main culprits remain the same, in any case: electricity and food, which are helped by lower sales than last year in clothing and footwear. The only positive point is fuel, which according to the statistical institute falls, and that the monthly rate, compared to June, is moderate: life costs 0.2%.

Once again, the evolution of core inflation, which does not take into account energy prices and fresh products, is of concern. It adds six tenths, up to 6.1%, and reaches the maximum of 1993. It confirms that little by little the entire shopping basket has been infected by the rise in prices. "It's bad data. Inflation is the main task ahead of the Government”, recognized President Pedro Sánchez.

The battery of measures of the Executive have not just had an effect. Hence another package with more advanced decisions yesterday. “The government measures are not working. In September, with a possible energy shortage, inflation can even reach 14%-15%”, explains Juan Carlos Higueras, economic analyst and professor at EAE Business School.

With such high rates – a record 8.9% has been set in the eurozone – the threat is that consumption, one of the pillars of Spanish growth, will slow down after the summer. Precisely, consumption is the determining factor in the second economic figure known yesterday. A growth of 1.1% in the second quarter of the year that becomes the good news, especially in contrast to that inflation that continues unleashed. Despite the war in Ukraine, prices and uncertainty about gas supply, GDP grew more than expected, surprising analysts. A growth well above the slowdown in the first quarter, in which GDP increased by a meager 0.2%.

The keys were consumption and tourism. Household consumption recovers strongly and goes from falling 2% to growing 3.2%. It has not increased so much since the second quarter of 2021. On the other hand, it also helps that the dynamism of investments is maintained, which has risen for four quarters.

This growth data, although provisional and subject to revision as the INE itself warns, allows us to accumulate forces for a second part of the year in which all analysts predict a slowdown in activity.

“It is a better figure than we expected,” says María Jesús Fernández, from Funcas, who highlights consumption and tourism as the engines of this rise, with tourist spending that would already exceed the pre-pandemic level, and also investment in construction both in housing, and especially in non-residential construction.

"The recovery of the quarter is based on consumption, the reactivation of tourism and the chute in the hospitality industry," says Javier Ferri, from Fedea. Looking ahead, the forecasts are not so good. However, Ferri believes that growth can continue in the next quarter, although less than in the current one. In August, tourism still counts for a lot, and therefore its positive effect will be felt.

With the growth data for the first and second quarters, it can already be ensured that the economy will grow by 4.3% that year, barring a catastrophe, of course. But even if the rest of the year the GDP does not grow, it will reach 4.3%. This is pointed out by Ángel Talavera, from Oxford Economics, and confirmed by other economists such as Ferri and Fernández. "Even if there were some moderate decline in growth in the second part of the year, GDP could reach 4%," adds the latter. 4.3%, which is the latest government forecast for this year, accompanied by a much lower 2.7% in 2023.

For the Ministry of Economy, these data "reveal the strength of the Spanish economy in a context marked by uncertainty due to Russia's war in Ukraine and the global economic consequences, as well as the effectiveness of economic policy measures to reduce the effects of inflation”.

In any case, looking to the immediate future, expectations call for preparing for a drop in activity in the second half of the year. The summer is expected to sustain economic activity, thanks in large part to tourism, which has practically recovered to pre-pandemic levels, but this will weaken after the summer season, with a final quarter in which some analysts even predict a zero growth.

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