Brussels raises Spain's growth by three tenths to 2.2% in 2023, but cuts that of the euro zone to 0.8%

The economic cooling in Europe is increasingly palpable, so much so that the European Commission has been forced to take out the scissors again and cut its growth forecasts for this year. The GDP of the euro zone will barely grow by 0.8% in 2023, compared to the 1.1% that Brussels estimated before the summer, a considerable loss of steam that will last until 2024, a year in which the bloc's economy will slow down until 1.3% in contrast to the 1.6% predicted in May.

The blame is on the growing "weakness of domestic demand, particularly consumption," which reflects how high inflation, with prices still rising for most goods and services, "is taking a higher than expected toll on the spring forecasts".

This is reflected in the summer macro projections report published this Monday by the Community Executive, which admits that "the strong slowdown in the provision of bank credit to the economy shows that the tightening of monetary policy is making its way through the economy". In fact, Brussels recognizes and warns that "monetary tightening may weigh on economic activity more than expected," although in return "it could lead to a more rapid decline in inflation that would accelerate the recovery of real incomes."

Their warnings are in line with those formulated by the ECB, in whose last economic bulletin, published last August, warned of a weakening of domestic demand caused in part by the tightening of financing and mortgage conditions and, therefore, from a deterioration in growth expectations for the euro zone in the short and medium term.

Among the large economies of the euro, Spain will resist the onslaught of the slowdown better this year than its counterparts. In fact, Brussels has revised upwards, to 2.2%, its forecasts for the Spanish economy, three tenths more than in the May report (1.9%), essentially the result of the carryover effect of 2022, "higher than expected", and to the "solid" behavior shown in the first half of this year.

This does not mean that Spain is immune to the sudden cooling of activity in the bloc as a whole. In fact, the European Commission warns that the national economy will also lose gas between now and the end of the year, a weakening that "will extend at least until the first half of 2024" and that has led Brussels to cut its forecast for Spain in 2024, up to 1.9% compared to the previous 2%.

In other words, if Europe catches a cold, Spain will also end up sneezing, with a "more moderate economic expansion in the second half of 2023" as the thrust of the tourism sector, one of the great driving forces of the national economy, loses. momentum after the good results of the summer season, and aggregate demand is hit by "more restrictive financing conditions" and the labor market subject to "weaker dynamics."

For Brussels, however, not everything is dark clouds. Spain is one of the European countries with the lowest general inflation rate (2.6%, less than half that of the euro bloc), a gradual relaxation of prices that, according to the European Commission, is allowing the pressure to be relieved on the purchasing power of families, which have also begun to benefit from a clear increase in nominal wages, thus "partially mitigating the headwinds of private consumption." Added to this is the lower debt of the private sector and "the resilience of the Spanish banking sector", factors that will contribute to mitigating financial risks.

Inflation, which continues to be the great enemy to beat in Europe, will maintain the path of moderation begun months ago as energy prices continue to deflate, but it will still clearly exceed the ECB's 2% reference objective in Spain. Brussels expects the harmonized CPI to end this year at an average rate of 3.6% in our country, before falling to 1.9% in 2024.

Much less optimistic are the forecasts for the euro zone and the EU as a whole, where average inflation will close this year at 5.6% and 6.5%, respectively. thus maintaining pressure on the monetary policy of the ECB, whose Governing Council will hold a crucial meeting this Thursday to determine whether to pause or continue to deepen interest rate increases. According to the Commission's calculations, the CPI will end in 2024 at 2.9% in the single currency bloc and at 3.2% in the EU as a whole, still above the target rate of 2%.

Against the backdrop of a cooling that will be notable in the euro zone, the biggest brake on growth will come from its great economic locomotive, Germany, which in 2023 will not only be sick, but will go backwards. Brussels estimates that the German GDP, which represents around 20% of the entire EU economy, will contract by 0.4% this year compared to the 0.2% growth that was estimated in spring, entering recession as a result of the fall in private consumption, the loss of steam in its exports due to the weakening of external demand and the fall in investment, especially in construction.

All this with an average inflation of 6.4% this year, one of the highest rates in Europe. The horizon improves for 2024, the year in which Brussels foresees a rebound in German GDP of 1.1% hand in hand with the recovery of consumption.

The Commission also offers forecasts for the other two large euro economies: France and Germany. In the case of the French economy, the Community Executive forecasts growth of 1% this year and 1.2% in 2024, while it anticipates an increase of 0.9% of Italy's GDP in 2023 and 0.8% in 2024.