The Spanish economy in the context of a shift in monetary policy
Fecha: julio 2022
SEFO, Spanish and International Economic & Financial Outlook, V. 11 N.º 4 (July 2022)
The ECB’s policy conundrum
Higher and more persistent than expected inflation disrupted the ECB’s initial forward guidance from late 2021. As the ECB pivots to unwind stimulus more aggressively to tame inflation, it must minimize fragmentation risk and the disruption of monetary policy transmission across eurozone financial markets.
Spanish economic forecasts for 2022-2023
Despite a weak start to the year and headwinds from high energy prices and double-digit inflation, Spain’s prospects for the next few months remain favourable. However, after the end of the tourism season, the loss of consumers´ purchasing power along with more restrictive financial conditions and geopolitical risks mean growth is expected to slow considerably from the end of 2022.
The financial risks posed by inflation
Rapid monetary tightening in response to persistent inflation carries serious risks for business and consumer borrowers. A higher-than-expected increase in borrowing costs would have significant knock-on effects for private sector financing with the property and mortgage markets particularly exposed following a period of robust growth, albeit the impact in Spain is expected to be moderate.
The yield curve and the bank-public debt nexus
For banks, higher rates mean better interest income, but also higher debt servicing costs for households and businesses and a decline in the value of securities held on banks’ balance sheets. In this context, for the first time since the Eurozone Crisis, the bank-public debt nexus is under renewed scrutiny, as monetary tightening unsettles markets and yield curves shift up.
The shifting income structure of Spanish banks
While recording among the lowest share of fee and commission income as a percent of total earnings compared to other EU banks, in line with their peers, Spanish banks too adapted to the low interest rate environment by raising fee and commission revenues. With interest rates on their way up and volatility increasing, rising net interest income and trading gains for Spanish banks may help reverse downward pressures on profitability.
Readiness of the Spanish insurance sector in a shifting economic and financial environment
Increasing interest rates and rising inflation bring a mixture of opportunity and concern for Spain’s insurance sector. Rising rates should support life insurance and savings products, while slowing growth and higher inflation may erode demand and margins for other products and segments.
Revenue and employment at Spanish manufacturing firms reach pre-pandemic levels
Spain’s manufacturing industry has overcome the pandemic induced bust, but sector level trends appear to be diverging. In most sectors, revenue and employment are above pre-pandemic levels, while other sectors have used the pandemic to find efficiencies and downsize workforces, with the transportation material sector struggling with shortages and the green transition.