Consensus GDP forecast for 2021 slashed to 4.8%
Since the last survey was published in September, the National Statistics Office has revised its second-quarter GDP figure sharply lower, from an initial estimate of 2.8% to 1.1%. It has also published the third-quarter GDP figure, which it has provisionally estimated at 2%. Both results are well below expectations, which envisioned that Spain would be one of the main engines of growth in the EU.

Moreover, the fourth quarter is being marked by the spike in inflation and supply disruptions. The analysts are expecting fourth-quarter growth of around 2% (Table 2), with several expecting the third-quarter figure to be revised upwards. Altogether, economic growth would reach 4.8% in 2021, down 1.4 percentage points from the September consensus estimate. All of the analysts have cut their growth forecasts since the last Panel.

The consensus forecast for 2022 has been cut to 5.7%
The forecast for 2022 has also been trimmed from 6.1% to 5.7%. The outlook is for quarterly growth of around 1%. In general, the 2022 forecasts assume that energy and commodity prices will remain high until the spring, at which point they will start to come down. The assumption made by most of the analysts is that Spain will execute around 20 billion euros of the NGEU funds next year.

Fresh upward revision to CPI forecasts
In October, headline inflation increased to 5.4%, fuelled by three factors: (i) the higher cost of energy products – electricity, gas and fuel; (ii) the return to pre-pandemic price levels in certain services that last year suffered price corrections as a result of the crisis – notably international tourist packages and hotels; and, (iii) some passthrough of higher production costs on end prices of certain food and consumer goods products.

In this survey, the consensus inflation forecast has risen again, to an annual average of 2.9% this year and 2.4% next year, 0.5pp and 0.8pp above the September forecasts, respectively. The forecasts for core inflation are also higher at 0.8% and 1.4% for 2021 and 2022, respectively.

The year-on-year rate of inflation forecast for December this year is 5.2%, and 1.1% in December 2022 (Table 3).

Improved unemployment projections
The results of the third-quarter labour force survey were good, despite the fact that economic growth was slower than expected. The number of people in employment increased by 1.3%, permitting a decline in unemployment by 2.4%, despite an increase in the active population as a result of an increase
in the participation rate. The unemployment rate has been brought down to 14.6%, 1.7 percentage points below that of 3Q20. The current forecast for the average annual rate in 2021 is 15.2%, down 0.4pp from our September survey. For 2022, the consensus forecast stands at 14.4%, down 0.3pp.

The forecasts for growth in GDP, job creation and wage compensation yield implied forecasts for growth in productivity and unit labour costs (ULC). Productivity is expected to decline by 0.5% this year (the September survey pointed to gains) and to increase by 2.3% in 2022. ULCs, meanwhile, are forecast to rise by 0.7% in 2021 and fall back by 0.5% in 2022, having risen sharply in 2020, although the trend in these variables should be interpreted with caution.

Solid trade surplus
The current account surplus stood at 5.5 billion euros as of August, up 1 billion euros by comparison with the same period of 2020. The sum of the current and capital surpluses is 10.2 billion euros, up by 3.6 billion euros.

The consensus forecasts for the current account surplus have barely changed: 1% of GDP in 2021, rising to 1.2% in 2022.

The public deficit is expected to come in below the government’s forecast
The fiscal deficit, excluding local authorities, amounted to 54.97 billion euros in the first eight months of 2021, compared to 79.48 billion euros in the same period of 2020. That improvement has been shaped significantly by the extraordinarily positive trend in tax revenue, which is running almost 20 billion euros higher than in the same period of 2020 and even 5.7 billion euros higher than the 2019 figure. National social security contributions are also tracking well ahead of expectations, up 3.7 billion euros from the same period of 2020 and 4.4 billion euros better than in 2019.

The consensus forecast is for a public deficit of 7.9% of GDP this year, down 0.2pp from the September survey, despite the diminished growth prospects. That forecast is better than the government’s projection of 8.4% of GDP (as embedded in September budget plans).

Next year, however, the consensus forecast is higher than the government’s deficit target: 5.7% versus the 5% set down in the budget bill.

Downturn in the international context due to supply chain disruptions and escalating energy costs
The pervasiveness of bottlenecks, which are hitting the advanced economies particularly hard, along with the escalating cost of energy, are acting as a drain on the global economic recovery, while intensifying inflationary pressures. Another source of weakness is the bursting of the property bubble in China. All of which has prompted the IMF in its autumn report to cut its growth forecasts and raise its inflation estimates for 2021.

Indicators suggest that these trends will persist in the short-term. According to the global PMI readings, production costs continue to rise, particularly in manufacturing. Supply disruptions and rising energy prices are driving delays in the production of cars and all sorts of consumer goods, while nudging shopping basket prices higher and undermining the rebound in demand which was expected via the release of the precautionary savings amassed during the crisis.

The US economy is proving to be one of the hardest hit by the bottlenecks due to the momentum in demand as a result of the cash transfer programme and other fiscal stimulus measures. Headline CPI increased by 6.2% in October, with core inflation at 4.6%. However, the European economy is also suffering. Inflation topped 4.1% in October, up from 3% in August (the most recent figure available prior to the last survey), shaped largely by the rise in electricity and fuel prices. Core inflation was a little over 2%, up half a point from August.

The analysts’ forecasts reflect these trends: they are getting less optimistic about the international context. The difference between positive and negative opinions about the European economy is down to 3, from 10 in September. Likewise, the number of analysts expecting a deterioration in the coming months is increasing. Outside the EU, fewer analysts rate the context as favourable relative to those who see it as unfavourable (3 versus 10), a turnaround since September (9 versus 4). Most believe that the current climate will remain the same, or even get worse, in the months to come.

The uptick in inflation is complicating the central banks’ task
The main advanced economy central banks see the spike in inflation as a transitory phenomenon underpinned by reversible factors, such as the growth in semiconductor prices and tightening caused by the abrupt nature of the global economic recovery. However, faced with the intensification of inflationary pressures, monetary authorities acknowledge that the return to a trajectory consistent with the stability targets may take longer than expected, increasing the risks of second-round effects. By way of prevention, some central banks have increased their benchmark rates (Australia, Norway and Poland). The Federal Reserve, meanwhile, has brought forward its timeline for rolling back its debt purchase programme. And the ECB is expected to announce a similar roadmap, albeit more gradual than on the other side of the Atlantic.

The markets have begun to incorporate the shift in inflation expectations. The yield on Spain’s 10Y bonds is close to 0.5%, which is 15 basis points higher than in September, and the spread over the comparable German bond has widened slightly. 12-month EURIBOR has barely budged, evidencing the stability in ECB benchmark rates, particularly the rate on the deposit facility, anchored at -0.5% in the short-term. However longer-term interest rates are beginning to tick higher, though still remaining at low levels.

Against that backdrop, the analysts believe that market rates will continue to climb higher throughout the projection period. The yield on 10Y public bonds is expected to increase to 0.79% by year-end 2022, up from a forecast 0.65% as per the September survey.

Euro depreciation
Given the prospect of more pronounced monetary tightening in the US than in Europe, the euro has tended to depreciate since the last survey. The analysts expect the euro to trade at under $1.20 throughout the entire projection period (Table 2).

Macroeconomic policy should remain expansionary
The analysts unanimously consider that both monetary and fiscal policy are expansionary and nearly all of them believe they should remain so for the coming months (Table 4). No changes of substance are expected in ECB benchmark rates until the end of 2022.