The Bank of Spain is also joining the long list of entities that are revising upwards their growth forecasts for the Spanish economy this year. It raises it by three tenths compared to its calculations from three months ago, now standing at 3.1%, and also adds a three-tenths increase for 2025, bringing it to a GDP growth of 2.5%.
This growth, higher than expected, is due to three factors. One is the spillover effect of the National Accounting revisions carried out by the INE in September, and the other two stem from the better-than-expected GDP result in the third quarter and the strength that the activity is demonstrating in the final stretch of the year, so that in these last three months the economy would grow between 0.6% and 0.7%.
During this last quarter of 2024, private consumption is driving economic activity. This expenditure has become and will continue to be one of the main growth drivers of the economy in the coming quarters, although its recovery lags behind that of GDP. Two questions arise here. Firstly, why is household spending recovering? And secondly, why is it not doing so at a faster pace? The first question is largely explained by a resilient labor market, the progressive improvement of financial conditions, and high levels of savings.
This being true, private consumption is recovering, but it is doing so with a delay compared to the GDP. Specifically, private consumption in 2027 would be 10.4% above its pre-pandemic level, while the GDP difference is 13.5%. Moreover, average household consumption remains below pre-pandemic levels, and the savings rate continues to be higher than it was in 2019 and above its historical average.
The reasons for this delay pointed out by the Bank of Spain is that there could be a perception among households of a worse economic situation than they actually have. To support this thesis, they provide a survey from the ECB that shows this different perception, and they have also conducted their own study indicating that there is more reluctance to consume among higher incomes and those who live in rented accommodation. One hypothesis, to be confirmed, is that these are households that have accumulated higher incomes and are considering buying a home, which would stimulate them more towards saving than consumption.
On the other hand, investment will increase its contribution to growth in the coming quarters, largely thanks to the increased implementation of the recovery plan and improving financing conditions. However, it is still behind schedule compared to what was expected.
On the other hand, public consumption, a strong driver of growth in 2023 and 2024, will moderate its contribution, partly due to the brake that European fiscal rules back in force impose on this expenditure.
Regarding inflation, the Bank of Spain expects it to remain stable and to start decreasing towards levels around 2% starting in March 2025. This process is possible due to the moderation of core inflation and, above all, due to the slowdown in the increase of food prices that is being observed.
The damage will have a limited and temporary effect on growth, while causing a 0.5% increase in public spending.
Another element calculated by the Bank of Spain is the economic impact of the cold drop, both on growth and deficit. As for the GDP, its effect will be limited, resulting in a decrease of one or two tenths in the fourth quarter, which is considered a transitory effect that could be reversed by mid-2025 thanks to the aid measures for affected families and businesses. What the “dana” will indeed cause is an increase in public spending, with repercussions on the deficit. Compliance with the 3% limit this year is in jeopardy, as the measures taken to address these floods could increase the deficit by 0.5% of the GDP, to be spread between this year and 2025.
However, the Bank of Spain itself points out that these expenses are of an extraordinary nature and would not affect Brussels' assessment of the Spanish accounts.
Regarding the fiscal and structural plan presented to Brussels, it is estimated that net primary spending will be higher than the Government's initial projections. While the Executive forecasts a monthly increase of 3.5% during the 2025-2027 period, the Bank of Spain suggests that an additional adjustment averaging between 0.3 and 0.4 percentage points annually would be necessary. Translated into a deficit, this would represent about 0.2 percentage points of GDP, around 3,000 million per year during this period.
