Spanish gross domestic product growth for 2022 is estimated at a robust 5.3% according to Oxford Economics data.
High energy prices and the subsequent monetary policy response will drag down the Spanish economy in 2023. However real GDP is likely to continue to grow in 2023 by 1.1%, while the eurozone economy is expected to shrink by 0.1%.
The economy decelerated in the third quarter with GDP growing at 0.05% quarter on quarter substantially below the 1.95% previous quarter’s figure and with provisional data for the fourth quarter at 0.2%.
GDP may continue to decline during the first quarter of 2023 before picking up again from spring 2023 onwards.
The main driver of the economic slowdown is the loss of household purchasing power as a result of prevailing inflation and a foreseeable impact on private consumption. In addition, recession in European countries like Germany will have adverse consequences for Spanish exports and tourism.
However, fourth quarter 2022 economic indicators are not coming as weak as initially feared.
The manufacturing sector continues to contract but the latest PMI figure point to stabilisation after the December PMI index for the industrial sector was slightly up to 46.4 from 45.7 in November. The PMI index for the services sector has also been recovering and stands comfortably well above the no-growth threshold, after registering a second successive monthly rise in both activity and new business.
The labour market is showing resilience and still supports the activity. Unemployment fell by 1.52% month on month in December and by 8.64% compared with December 2021. Job creation cooled in December, but it does not alter the employment's good performance in the last quarter of the year. Employment net of furloughed workers increased, in seasonally adjusted terms, 0.6% quarter on quarter in the fourth quarter.
Tourism demand stayed strong during the low season. International arrivals were just 6.9% below November 2019 level, while international tourist expenditure was 6.3% below. High-frequency indicators confirm tourism demand resilience during the Christmas season. The volume of airport operations in Spain during the Christmas season was only 3.2% below the same period of 2019.
The decline in electricity prices is providing some respite to inflation figures and peak inflation seems to be in the past. Headline inflation decreased to 5.7% in December but average headline inflation is forecast to remain elevated in 2023, at 4.5%. The slowdown in economic activity and the tightening of macro-financial conditions should take some steam off prices and second-round effects are expected to be limited, as wage pressures remain subdued.
To tame inflation, the European Central Bank increased interest rates by 50 basis points in December taking its deposit rate stands at 2% and is likely to hike its policy rate by additional increases during 2023.
The economy’s ability to withstand the rise in interest rates is another source of risk. However, unlike the last crisis in 2008, financial risks look moderate thanks to the deleveraging in the Spanish private sector and the healthy momentum in the labour market.
The pace of monetary policy normalisation and geopolitical tensions are injecting a high degree of uncertainty into the forecast scenarios but the Spanish economy so far is still holding up better than expected.