The economic pull versus its perception

The trajectory of the economy continues to be positive, according to the main macroeconomic indicators of activity and job creation, and everything points to GDP exceeding its pre-pandemic level this quarter. In the table, however, a gray area persists, which is not minor: the weakness of household demand, as confirmed by the successive rounds of ECB forecasts. The central bank has just cut its forecast for consumption growth in the euro area to a very poor 0.2%, compared to the 0.7% announced in December. And conversely, the GDP forecast is revised upwards to 0.9%, double that of December.

The vision of the Spanish economy is even more contrasting, with growing pessimism in relation to household spending (the OECD has cut it to 0.5%, almost three times less than in the autumn round) without denying the optimism about the evolution of activity (GDP has been revised to 2.1%, practically double that of the autumn and one of the best results in Europe). This dichotomy is also reflected in qualitative confidence surveys, and helps to elucidate the contradiction between the reality of an economy that is doing better than predicted and social perception.

The explanation for this disconnection must be found in how the de-escalation of energy prices and other supplies has been transferred to the productive fabric. According to the ECB, production costs have fallen to the beat of the turnaround in the international markets for the main raw materials. But domestic prices have reacted late, widening business margins while maintaining pressure on the CPI. On the other hand, remunerations have maintained a moderation path: agreed wages in the euro area as a whole rose 4.3% in the first quarter, almost four points less than the CPI, aggravating the loss in purchasing power accumulated since the start of the inflationary outbreak. The trend has been similar in Spain, although the erosion of purchasing power has been somewhat less pronounced than the European average (-2% in the first quarter discounting inflation).

Fortunately, the resilience of the labor market has attenuated the impact of the shock prices in the pocket of households, thanks to the contribution to family budgets of new sources of income. Quite the opposite of what happened in the financial crisis, when the drain on jobs generated a collapse in disposable income and an unprecedented drop in consumption (a chilling -9.6% between 2010 and 2013), so that the standard of living of families is still in decline with respect to the pre-financial crisis levels.

All in all, the ECB anticipates an improvement in consumption in the coming years, based on two premises. One, that wages recover purchasing power, something that seems possible as disinflation takes hold and wage agreements integrate compensation measures. The other premise is that employment continues to hold up, and this will depend on the resistance of the economy to the rise in interest rates. And that is where the main unknown lies: the central bank is optimistic, but it also recognizes that the increase in the cost of money is affecting the most indebted sectors, at the same time that investment financing is cooling off —one of the most powerful engines of the currently growing. Lagarde implies that the interest rate tightening cycle is not over, so there could be at least two more twists. With the high risk of invalidating their own forecasts of sustained expansion. And frustrating the expectations of improving the standard of living.

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