The Spain Economy
Spain is located on the Iberian Peninsula of Europe, and is comprised of 17 autonomous regions. Its capital, Madrid, has the Royal Palace, and the Prado museum, which displays European masterworks. The medieval city of Segovia has an intact Roman aqueduct and medieval castle. Barcelona, the capital of Catalonia, is characterized by modernist landmarks and Antoni Gaud architecture.
Inflation is expected to slow to 1.6% in 2022
Global inflation has been running at a high pace, with prices rising at an average annual rate of 4% for most items. While the United States began tightening policy early, the euro area lags behind, with inflation projected to remain high. This has led to a widening of the disparity between U.S. and European inflation, which is expected to slow to 1.6% in 2022.
Slower inflation is needed to maintain the stabilisation of the economy. However, a sustained rise in inflation will erode the purchasing power of savings, thus lowering their role as a buffer. Inflation is projected to return to its target level by 2024, while the saving ratio will remain well below pre-pandemic levels. According to economists, this slowdown will result in real disposable income falling slightly in the first half of 2022. However, this decline will be partially offset by higher energy prices and lower net fiscal transfers.
Inflation in major emerging-market economies will be mixed. While China and Brazil are expected to experience lower-than-average inflation, Mexico and Argentina are expected to face significant inflation pressures. While high-priced energy and food will likely slow in 2022, rising labor costs will continue to push up prices. Furthermore, inflation is expected to remain high in Turkey and Argentina, which are likely to experience a disruption in energy supply.
Recent data surprises have impacted Eurosystem staff projections for inflation in 2022. Some of these data surprises include dramatic increases in electricity and gas prices. Further, recent weak economic growth and supply bottlenecks have dampened wage growth. If these trends continue, inflation could reach 8.4% in 2022, 6.9% in 2023, and 2.7% in 2024.
The Consumer Price Index (CPI) for all items has generally increased during the second quarter of 2022, with food and energy making up more than half of the increase. The headline rate of inflation in 2022 was only 0.3 percent in April, but accelerated to 1.3 percent in June on the back of high energy prices. Natural gas prices rose 106 percent over the same period.
Recent data suggest that the global economy will continue to experience a slowdown. Meanwhile, global inflation is expected to be higher than its long-term average. A combination of weakening demand and persistent inflation will likely lead to a recession at the end of 2022. Further, a slowdown in growth in China may have an adverse impact on inflation.
The tertiary sector contributes 67.8% of GDP
Spain’s economy has been largely dependent on the tertiary sector, which is responsible for 67.8% of its GDP and employs 76% of the active population. Tourism is a major source of income, although it has been declining in recent years. Despite the slowdown, Spain is still the second-largest tourist destination in the world, attracting 83.7 million tourists in 2019. Spain’s banking sector is also important, with twelve major banking groups, including 51 private banks.
Exports have recovered faster in Spain than in most of its European partners. In 2018, exports to EU27 countries increased by an above-average 23.8%, making them the largest share of exports. France, Belgium, Italy, Portugal, and Greece were the leading contributors to the growth of Spanish exports, while sales to third countries increased 17.3%.
The Spanish government has implemented a scheme to assist small and medium-sized enterprises cope with the effects of COVID-19. It also has a dedicated portal on its official governmental portal, La Moncloa. In addition, KPMG has created a webpage dedicated to the COVID-19 pandemic.
The COVID-19 epidemic has had a negative effect on Spain’s economy, with its general government deficit rising rapidly in the first half of 2021. However, the economy is on track to return to a healthy pace in 2022. Spain’s debt-to-GDP ratio is expected to remain stable over the forecast horizon, at 116%.
Spanish private commercial banks have played a vital role in Spain’s economic development. In the nineteenth century, their role as state creditors provided them with the ability to monetize public debt. They benefitted from state-sanctioned oligopolistic arrangements until the late 1980s, when European rules forced the sector to liberalize.
Public debt is expected to reach 6% of GDP in 2023
The federal government’s debt is expected to increase over the next decade. It is projected to reach 96 percent of GDP by 2023. After that, debt is projected to continue to grow. It is projected to reach 110 percent of GDP by 2032 and 185 percent by 2052. However, that projection includes the possibility that Congress will increase the debt with new legislation or tax increases.
Under current laws, the government is projected to increase its outlays at a rate faster than the growth in the economy. This means that net interest costs will double as a percentage of GDP by 2032. As a result, the government will experience large budget deficits. For example, interest on federal debt and Medicare will continue to grow steadily, while revenues do not keep up.
However, the government is not expected to face a crisis of debt relief in the near future. The federal budget deficit is projected to increase throughout the next decade. By 2023, the government will have a deficit of $2.3 trillion – a record high by historical standards.
In FY2022, the budget deficit is expected to be 4.7% of GDP. This is expected to improve with stronger tax reforms. The current account deficit is projected to rise to 4.4% of GDP in 2023 due to the deterioration in the terms of exchange. Despite the positive outlook, the government’s debt is still at an unsustainable 51.6% of GDP, which could trigger a recession. In addition, a new pandemic or prolonged conflict with Russia may compromise the outlook.
Unlike GDP, the federal government’s debt is made up of assets that are held by the public. The Federal Reserve holds the largest portion of government debt, accounting for over one-third of the debt. The federal government is expected to issue another $18 trillion in the coming years, increasing public debt to $40 trillion. This would be double the 50-year average and would be the largest debt in history.
The CBO has recently released its latest economic projections. They show that real GDP will continue to increase, but at a higher pace in 2022 and 2023. In addition, CBO expects higher inflation, which means higher interest rates for the next decade.
The impact of COVID-19 on Spain’s economy
The Covid-19 virus pandemic has had a devastating impact on Spain’s economy. Last spring, the virus spread throughout the country and nearly crippled the Spanish health system. The disease forced schools, hospitals, and businesses to shut down, and confined people to their homes. This virus has caused major disruptions in daily life and cannot be controlled until vaccines and treatments are developed and widely available.
The impact of COVID-19 has been felt across Spain’s economy, affecting every sector. The scale of the humanitarian crisis was matched by the wide-ranging economic disruption. Spain’s companies, which had been riding on a six-year economic expansion, have had to abandon existing strategies and rapidly adapt their business models. As a result, their profits and morale have fallen significantly. While government support continues to flow, it’s crucial to maintain investment and reform programs focused on creating high-quality jobs.
In addition to impacting the country’s economy, the pandemic’s impact on Spain’s tourism industry is particularly significant. The industry accounts for 14.3% of Spain’s GDP, or about $200 billion. The decline in tourism in Spain is the most severe since 1936-1939. While there are plans for a vaccine, it’s unclear whether it will be available until 2021. In the meantime, the economic and social crisis is set to continue.
COVID-19 has affected Spain’s tourism sector, which accounts for the third-largest number of foreign tourists in the world. However, it also has impacted other sectors such as the country’s diverse industrial base. Major cities such as Barcelona and Madrid are crucial commercial hubs for Spain.
The Spanish government has stepped up its efforts to address the crisis. In addition to expanding a furlough program, it has fast-tracked the introduction of a non-contributory social assistance program called Minimum Vital Income (MVI). The Spanish Government is a relative latecomer when it comes to a nationwide social assistance program, but the country’s new program is designed to supplement its existing social security system.
