Improved prospects

During the pandemic, world consumption of industrial products and other goods skyrocketed to the detriment of services, with particularly detrimental effects on economies like ours with the greatest presence of these sectors. Now the opposite is happening: it was clear that the pattern of demand had to be reversed to a greater or lesser extent, but the movement is being more intense than anticipated, providing a short-term boost to the Spanish economy and at the same time putting pressure on prices.

Activity in the sectors linked to tourism and leisure is growing at a rate that is close to double digits in the EU as a whole (discounting inflation), which reveals the strength of the demand for these services. The pull is perceived in our tourism sector, as well as in the branches that export other services, more than compensating for the weakness of domestic demand. This suffers the burden of the registered contraction of household consumption. Thus, GDP growth is mainly due to foreign contributions, without which we would already be in recession (the contribution of domestic demand has been negative in the last two quarters, draining a total of 1.6% of GDP).

The impetus given to activity in services still has some way to go thanks to the persistence of the savings stocks dammed up in other European countries. In average terms, European families registered a significant financial surplus in 2022, which is added to the juicy surpluses registered during the pandemic (in Spain, however, household accounts show a financial deficit). At the moment, European consumers are pulling on that liquidity cushion for the benefit of our exporters and tour operators. But the effect will eventually wear off, so the outlook for the end of the year is less buoyant, especially given the impact of the rise in interest rates, which is expected to grow in crescendo.

On the other hand, the stimulus that comes from external demand also puts pressure on prices. This is supported by the latest CPI data, with increases of more than 1% in the month of April in hotels, restaurants, leisure and culture, and which bring inflation in the services sector to 4.4% in year-on-year terms. double industrial goods without energy. The problem is that inflation in the services sector is usually quite persistent, even in the presence of a slowdown in demand.

Undoubtedly, the three-year rent agreement reached between employers and unions is good news because it reduces the risk of price escalation in the services sector and, in general, helps to anchor inflation expectations. It could also contribute to maintaining the extra competitiveness of our export fabric: among the other major European partners, only Germany has a similar income agreement. An agreement that, unlike ours, is based on the generous tax deductions provided by the State to facilitate consensus.

In short, the diversion of external demand towards services is combined with other factors, such as the moderation of energy prices and the good performance of the labor market to generate a shock growth favorable. For the same reason, inflation could be more persistent, especially in a context of pressure on food prices as a result of the drought. Despite this, the central scenario is one of de-escalation, especially after the unexpected rent agreement. The main unknown lies in the sustainability of the tailwinds from the second part of the year, which is when the impact of the monetary tightening led by the ECB will be most noticeable. The outlook improves notably in the short term, but the uncertainties force us to correct the imbalances without lowering our guard.

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