The employer raises its growth forecast for 2023 to 2.2% and asks to avoid "extremes" in the Government for "greater stability"

The Institute of Economic Studies (IEE) has published this Tuesday its semi-annual report on the economic situation, in which it has revised upwards its growth forecast for the Spanish economy for both 2023 and 2024. The CEOE study center has focused on the context of “political uncertainty” unleashed after the elections last Sunday, a scenario in which the president of the IEE, Íñigo Fernández de Mesa, has asked to avoid “extremes” in the formation of the Government. “Political stability is going to be very important so that the structural reforms we need can take place,” he stressed.

The employers' think tank has raised its growth forecast for this year by four tenths, up to 2.2%, one tenth below the forecast of the Bank of Spain and AIReF and three below the advance of 2.5% forecast by the IMF. “The Spanish economy has performed better than initially expected during the first half of 2023,” explains the IEE report, which attributes the good progress of the economy to the decrease in the costs of raw materials, the recovery of tourism, the good performance of exports and the strength of the labor market.

In addition, the IEE has also raised the Spanish GDP growth forecast for next year by two tenths to 1.5%, although it predicts that this progress will be “insufficient” to reduce the unemployment rate. “The tightening of monetary policy could result in a more moderate recovery by 2024,” the think tank qualifies. This forecast is more pessimistic than that of other organisms. For example, the IMF and AIReF predict a growth of the economy of 2% by 2024, while the forecast of the Bank of Spain reaches 2.2%.

Despite the upward revision, the IEE predicts a “notable slowdown” in economic activity in the second half of 2023. According to the think tank, one of the ingredients that will contribute to the economic slowdown is “political uncertainty.” “The result of the elections makes it difficult to form a government and creates a scenario of political uncertainty that increases the risk of a slowdown in the Spanish economy,” the report assesses, which explains that a context like the current one “negatively influences decisions and economic activity, which, if sustained over time, could lead to an additional brake on investment projects and employment.”

Faced with this situation, the IEE calls for “greater stability and predictability”, as well as an economic policy focused “on creating a more favorable climate for companies”.. For this, Fernández de Mesa has urged during the presentation of the report to “avoid extremes” in the formation of the future Government, which he has asked to defend the company for the “good economic development of the country”. The president of the organization pointed out that the company is in a “very weakened” situation due to the “significant” increase in labor, tax and financial costs.

deficit concern

The report published this Tuesday points out a series of pending tasks for the future government, including a multi-year budget adjustment plan that reduces public spending and strengthens the business environment and structural reforms that boost productivity and potential growth of the economies.. “It is essential to maintain the sustainability of public finances, meet fiscal targets and consider contingencies arising from financing conditions,” adds the IEE, which points out that Spain will close 2023 with a deficit of 4.3% of GDP. In 2024 it would drop to 3.8%, but it would remain far from the 3% projected by the current government in office.

For the employers' study center, the current political situation makes it difficult to carry out the budgetary adjustments that will require the approval of new European fiscal rules in the not too distant horizon. In fact, the IEE points out that, in the best of cases, the General State Budgets for 2024 will see the light of day with “a strong delay”, if there is a government and sufficient parliamentary support to approve them.. In addition, the IEE adds that “if tax increases were to be incorporated again, the expectations and distrust of the agents would worsen even more.”

As for inflation, the CEOE study center predicts that the price moderation process in which the Spanish economy is immersed “will be slow, given the persistence shown by underlying inflation”. Specifically, the IEE, which warns of the risk of rising prices passing through to wages, forecasts that the general CPI will fall below 4% in 2023 and approach around 3% in 2024. On the other hand, core inflation would end the year at an average of more than 6% and would not converge with the level of general inflation, around 3%, until 2024.