The Bank of Spain warns of the delay in the use of European funds

There are two main messages that the Bank of Spain launched yesterday.

Thomas Osborne
Thomas Osborne
06 October 2022 Thursday 00:44
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The Bank of Spain warns of the delay in the use of European funds

There are two main messages that the Bank of Spain launched yesterday. The main one is a forceful cut in the growth forecast for 2022, leaving it at 1.4%, which contradicts the calculations with which the Government has prepared its budgets. The supplementary is a notice about the slow deployment of recovery plan funds, which even leads him to propose a delay in the deadlines set for its execution by the EU.

In relation to growth, the correction is important. The 1.4% increase in GDP in 2023 is half of what the Bank of Spain had forecast in June; and it is also very far from the 2.1% on which the Executive based its budgets on Tuesday. There are seven tenths of a difference, and taking into account that both the OECD and the Airef calculate a 1.5% growth, doubts arise about the updating of the figures handled by the Government.

This reduction in growth for 2023 is combined with an improvement in the forecast for this year, which the Bank of Spain increases four tenths, to 4.5%, in its quarterly report on the Spanish economy.

The cut in GDP for next year is due to higher projected inflation rates, less favorable financing conditions, increased uncertainty, and weakening global demand. The activity will remain weak until the spring of 2023, when it will revive.

The turning point is the third quarter of this year, which will have a meager growth of 0.1%, according to the agency's preliminary estimate. We came from a period between April and June in which activity surprised everyone positively, but since July the indicators of loss of dynamism have multiplied. Thus, it will go from a magnificent growth of 1.5% in the second quarter to an almost flat profile in the third.

Everything comes because since July the rate of affiliation to Social Security has slowed down, the rise in energy prices has spread to the entire consumption basket and company billing has slowed down. To this can be added a loss of vigor in private consumption in a context in which consumer confidence is at its lowest levels since 2013.

The thrust of the first part of this year will serve to end it with a GDP increase of 4.5%, four tenths over the June forecast, but the effects of the economic slowdown will be transferred to 2023, and only in 2024 will it recover dynamism with the GDP growing by 2.9%. With these data, the recovery of pre-pandemic GDP levels is delayed again, now until the first quarter of 2024.

An important factor to boost growth are the recovery plan funds, but the Bank of Spain warns that their deployment is going at a lower rate than expected. Two facts illustrate this. On the one hand, public spending financed by these funds is reduced from 2% of GDP forecast in June to 1.4%, both this year and the next. And on the other, the calls granted throughout 2022 will total 11,778 million euros, when the Bank of Spain had calculated that they would reach 20,000 million.

Confirmed the delay in deploying these funds, Ángel Gavilán, general director of Economy and Statistics of the bank, points out the possibility of delaying the deadlines set by the European Union for their execution. “Given that investment in the energy transition is a structural factor that will accompany us over the next few years, it might be convenient to extend the terms for the management of these funds,” said Gavilán, insisting that “we are not so interested in the speed , we are concerned that they are assigned to investments with the capacity for transformation. If these delays are for a better selection of the project, they are welcome”.

In any case, this would be a European decision. In the current terms, time is given until 2023 to commit the funds and until 2026 for their disbursement.

Regarding inflation, the Bank of Spain also revised its forecast upwards, which places it at 8.7% this year and 5.6% in 2023. The upward correction of 3.1 points for next year is motivated by the recent surprises in the increase in prices, the new paths of energy prices and by a more depreciated euro. Here too, the agency diverges from the Government's forecast, which places prices for next year well below, at 4.1%.

The Bank of Spain calculates that the measures adopted by the Government to curb the increase in energy reduced the CPI for August by three points, that is, the 10.5% registered would have become 13.5% without these initiatives. Specifically, the mechanism to limit the price of gas used in electricity generation reduced inflation by more than one point in August. Additional measures come into force in September and October, such as the reduction in the price of transport and the VAT on natural gas.