The Spanish economy is going through a sweet moment, if not for high consumer prices, which make costs more expensive and reduce purchasing power from citizens. Exports are at a record, as is industrial production, the sale of homes or growth. In this last chapter, both the OECD and the Bank of Spain this week revised their upward forecasts for this year and next. Spain will be at the forefront of developing countries in growth , despite the skid in the second quarter that will reduce forecasts by one point. Even job creation, with more than 400,000 jobs so far this year, is going better than expected. The first vice president, Nadia Calviño, shows her chestand ensures that we will conclude 2021 with an activity rate similar to that before the pandemic, yes, measured from one day to the next. Growth in an instant, an unusual metric that shows what official propaganda is capable of.
Now, is government policy causing the economy to skyrocket? The OECD attributes this to the fact that one of the highest western vaccination rates has been achieved, which facilitated the reopening of the activity, while the Bank of Spain , places more emphasis on the consumption unbaked after the pandemic, which increases at rates of double digit. Neither agency cites a specific economic policy as the trigger for the rebound. On the contrary, both vaccines and consumption will have a gaseous effect, which will gradually dilute.
The next question is how long will the party last? If we turn to both bodies again, at least for the remainder of the year and for the next. The Bank of Spain even forecasts an acceleration in activity in 2022, as the delay in European funds will cause a large part of spending to shift to next year. If the GDP hit in 2020 exceeded 11 percent, the normal thing is that there will be a rebound effect during this year and the next one that allows us to return to the 2019 box, something that many EU countries have already achieved.
Interestingly, the two institutions agree that activity growth will languish to rates around two percent in 2023. The first conclusion, therefore, is that we are facing a rebound, not a vigorous recovery . Appearances are sometimes deceptive. When the post-pandemic champagne effect wears off, we will return to ridiculous growth rates that are insufficient to create jobs.
We are facing a rebound and not a long and vigorous recovery of the Spanish economy
Sánchez’s formula of everything for the people, but without the people, typical of the absolutist regimes of the second half of the 18th century, is bread for today and hunger for tomorrow. It has been seen with the light, the trip to the income statement of the electricity companies , skipping legal certainty, will temporarily reduce the cost of the receipt, but we will pay more than for the discredit abroad or when the courts force to return what was stolen .
Economic policy is based on spending : the budget ceiling for next year sets a record with more than 196,000 million, as well as public debt, while productivity remains low. The rise in the SMI reduces competitiveness and measures such as linking pensions to the CPI or increasing the number of civil servants will be a heavy burden on public accounts.
You may wonder why both organizations reach the same conclusion when they foresee a slowdown in 2023. The answer is quite simple, due to the lack of structural reforms that favor growth.
But there is something worse: the economists of these organizations have not yet incorporated into their forecasts, the increased cost of financing, which will occur from next year. Financial costs have been kept down in recent years thanks to the so-called quantitative easing policy of the ECB, which is now coming to an end . With a public debt close to 130 percent of Gross Domestic Product (GDP), any rebound in the risk premium will cost the public coffers hundreds of millions.
The higher cost of financing since January and the rate hike at the end of 2023 will spoil the party
I explain it. Both the European Central Bank (ECB) and the Federal Reserve (FED) of the United States will begin to progressively reduce their purchases from January. What does this mean? That if the ECB acquires less Spanish public debt (now it keeps all the new issuance, about 130,000 million per year), we will have to pay more to place it among private institutions.
The Spanish Luis de Guindos, vice president of the ECB, has been warning for months, without much success, that the withdrawal of support from the ECB is close, precisely to discourage public spending among euro governments. It is like preaching in the desert. But as they say, the harder the fall will be
And what deadlines does the ECB handle? The tightening of the so-called monetary policy will take place in two phases. In the first, stimuli will be reduced (including the aforementioned purchase of bonds) and then a timid rise in interest rates will begin, which are currently at negative rates.
The Financial Times reported last week a private conversation between the ECB’s chief economist, Phillip Lane, and a group of German analysts in which the latter dated the rise in interest rates to a couple of years, that is, the end of 2023. The leak, later denied by the institution, caused a rebound in bonds, because it anticipated the term managed by the experts by more than a year.
Media close to the ECB, consulted by this newspaper, confirm that the calendar is being advanced because the change in the German government will precipitate events. At the headquarters of the ECB in Frankfurt, the idea that Chancellor Angela Merkel was condescending to the European Union in two historical moments, which strengthened the euro, is handled. In the 2008 crisis, he clashed with his Finance Minister Wolfgang Schauble, a supporter of keeping public deficits at bay, and with the coronavirus, he advocated for a generous recovery fund to help weaker economies recover and shut down the open wounds from the pandemic.
Merkel promoted a policy of understanding with the South that will now be modified and will most likely harden after the elections. In 2023, the European Commission will also end the escape clause of the Stability and Growth Pact, which has allowed states to spend without limits. A victory for Social Democrat Olaf Scholz , current Vice Chancellor and Finance Minister, as the polls predict, would facilitate a smoother transition to the old rules, provided he governs in alliance with Annalena Baerbock’s Greens.
After the elections, a period of uncertainty will open until we know what the coalition that leads Germany will be like. It is unlikely that Sholz can govern only with the greens and will have to resurrect the coalition with the conservative Armin Laschet , Merkel’s follower. The key will be who supports the Finance portfolio. If it is the CDU, Laschet is expected to act tougher than its predecessor.
All parties, with the exception of the liberals of the FDP, are in favor of agreeing on a path of several years to return to the objectives of a public deficit of 3 percent and a debt below 60 percent of GDP. Both goals are in question, because with the pandemic the debt of all its members went above one hundred percent of GDP. C alviño requests that green investments are not taken into account for the calculation of the public deficit like other governments.
However, there is an uncontrolled element in which German politicians agree because it worries a lot and that tips the balance to accelerate the rate hike. That factor is called inflation . In August, it was around 4 percent, but it may reach 5 by the end of the year with the rise in electricity, which has not yet had an impact on consumers’ pockets as in Spain.
Germans’ phobia of inflation since World War II is behind the euro crisis. The fear of rising prices is in the unconscious of the German people and “whoever wins will advocate for raising the price of money to put a brake on it,” says a source from the ECB bluntly. The pressures from Schauble that caused a collapse of the Greek economy revive the ghosts of the past.
Be that as it may, in addition to the increased cost of financing, the States will have to close the tap on spending to gradually return to cleaning up their public accounts. With higher costs, with a restriction on spending and without reforms to increase productivity, the slowdown in activity is assured. Now you understand why economists predict the party will last just over a year. And because everything indicates that we are facing a simple rebound in the economy and not a lasting recovery.
Things will get even worse if high inflation continues until 2023, when we return to low growth rates. It’s what economists call stagflation, low growth with high prices.
This opens up another question that is even more complex to answer. Will the rise in prices be temporary or will it come to stay? The end of de-globalization and the rising cost of raw materials suggests that it will continue with us for a while, although it seems unlikely that it will last two years. But that’s a long debate, for another day. For now, enjoy the recovery while it lasts, because the price of money and the rate hike scheduled for late 23 or early 24 will spoil the growth party.