Activity should pick up in the course of 2023, supported by further easing of supply constraints, continued recovery in contact-intensive services and the acceleration of Next Generation EU (NGEU) investment spending, IMF noted after concluding its Article IV Mission to the country.
The sharp rise in global energy and food prices, the slowdown of activity in Spain’s trading partners, the deterioration of consumer and business confidence, and tighter financial conditions have slowed the recovery of output.
The unprecedented public support measures in 2020–22 have helped protect firms and households. The labor market recovery in 2022 has been robust, with employment exceeding its pre-pandemic level, the IMF said.
The high inflation over the past year has been largely caused by surging energy prices and persistent supply constraints. Headline inflation has declined from double-digit levels in the summer to 7.3 per cent in October, largely reflecting the drop in European gas prices and the impact of the Iberian mechanism.
Core inflation, a measure of price changes excluding energy and unprocessed food prices, remains elevated at around 6 per cent.
Output is projected to reach its pre-pandemic level by early 2024. Headline inflation is expected to moderate gradually in 2023 reflecting a high base in 2022, the reduction of supply bottlenecks, and some normalisation of global fossil fuel prices. Nevertheless, both headline and core inflation are likely to remain above the 2-per cent target until 2024.
Uncertainty around the outlook is high and risks are mostly to the downside. Risks to energy security are relatively low given Spain’s limited dependence on Russian gas and well-developed liquified natural gas infrastructure.
The main downside risk is a possible further increase in energy prices caused by either continued disruptions in supply or insufficient adjustment in demand in the European energy market.
Other risks include a more abrupt slowdown of the global economy or a sharper tightening of financial conditions, for instance due to a larger-than-anticipated increase in monetary policy rates in response to more persistent inflation in the euro area, the IMF said.
On the upside, a faster unwinding of households’ accumulated excess savings could boost private consumption.
ALCHEMPro News Desk (DS)
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