By: Sebastian Mariz, Managing Director of Influence Spain
Stuck in the middle of an intense institutional crisis over the renewal of the country’s Council of Judges, the Prime Minister faces a new year wrought with economic uncertainty, at least in its first quarter.
The Bank of Spain has issued its last economic report of the year, and warns that the first three to four months of the year will register zero growth, high inflationary pressures, higher financing costs and low consumer and business confidence. Despite the marked reduction in energy costs registered in the last quarter of 2022, the Bank of Spain expects inflationary pressures to remain high in the first quarter of the year, for food and other consumer goods, and employee salaries.
Nevertheless, the central bank does not expect the country to enter into recessionary figures, and expects the economy to rebound as of the 2nd quarter and to end the year with a timid growth of 1.3%, after closing 2022 at 4.6%. This growth in the 2nd quarter of the year is expected to be fueled through stabilization of prices and growing consumer demand thanks to an end to the energy shock provoked by the war in the Ukraine, and of the supply shock provoked by the pandemic. The Bank of Spain also expects growth to be fueled from a greater, and faster, roll-out of the 160 billion euros in EU recovery and resilience funds.
Unemployment and new employment affiliation data for the last quarter of the year have been published by the National Employment Office. Unemployment numbers have dropped to their lowest levels in 15 years, and currently stand at 2.837.635, with over 20.3 million workers affiliated to the social security system. The services sector, followed by agriculture and construction sectors are the three sectors registering the largest decrease in unemployment figures. These figures are somewhat clouded however, by the noticeable decrease in the number of affiliations to the social security system, registering the lowest levels in 10 years. This decrease is attributed to the economic slowdown registered since war broke out in Ukraine, and is expected to hit rock bottom in the first quarter of the New Year.
Temporary relief measures
In order to help Spain’s more vulnerable citizens navigate these uncertain waters over the next six months, and avoid voter protest and discontent in the run up to the municipal and regional elections of May 2023, the PM has adopted a new third package of temporary relief measures affecting the price of food, public transport and rent.
This third package, adopted in the last Council of Ministers of the year includes; temporarily eliminating VAT on basic foodstuffs, applying a reduced 5% VAT on oils and pastas, extending the 2% freeze on rental hikes for another six months, and paying 200 euros per family for food to over 4.2 million vulnerable households, also maintaining the reduced VAT and temporary elimination of special energy taxes on gas and electricity prices. The 20 cent/liter on petrol prices will, however, no longer be in effect as of the 1st of January, although the Government is still considering applying it to certain consumers such as truckers and other transport sectors.
The extraordinary welfare package will cost the Government an additional 10 billion, over and above the 9.3 billion already spent at the beginning of the year to cover the initial package of welfare measures to help vulnerable households and consumers cope with the economic slowdown and high inflation. Depending on the economic data published for the first and second quarter of the year, the Government is expected to shift its policy focus to business and economic growth in the second half of the year, focusing more on positive economic data and business development to generate a feeling of bonanza amongst voters prior to the general elections of the end of the year.
New Recovery and Resilience Plan to fuel growth
A new amended Recovery and Resilience Plan was adopted by the Council of Ministers of the 20th of December and presented to the Parliament by the Minister of Finance on the 22nd of December. The new amended Plan includes Spain’s request for the remaining 94 billion euros assigned to Spain under the EU’s Next General Funds, 24 billion more than what was agreed on in 2020, including an additional 2.2 billion assigned under the EU’s new Repower EU fund. The Repower EU was adopted to help Member States deal with the energy crisis arising from the war in the Ukraine. The additional 22 billion were assigned to Spain due to downward pressures on the Spanish economy from the war in Ukraine and the ensuing high inflation.
Of these 94 billion euros, 84 billion will be soft loans to the central Government, 7.7 billion euros will be non-reimbursable transfers to be used to reinforce the special economic recovery and resilience plans, or PERTEs, adopted by the Government in the summer of 2021 and 2.2 billion euros to speed up energy transition towards renewable energy sources including green hydrogen, solar PV, wind and biomass. An additional 18 billion euros in loans from the financial investors will also be used to reinforce the PERTEs.
According to the Minister of Finance, the bulk of the additional 25.7 billion euros in additional funds for the PERTE’s will go to those related to the semiconductor industry, electric vehicles, green hydrogen, energy transformation in Spain’s large industry, development of digital skills and competence in Spain’s small and medium sized companies, and energy efficiency measures.
Of the 84 billion euros in soft loans to the central Government, 20 billion euros will be set aside for the regional public administrations of Spain’s 15 autonomous regions and 15 billion in government sponsored loans managed by private banks.
According to the Minister of Finance, the Government has already earmarked 38 billion euros of the initial 70 billion euros assigned to Spain, of which 22 billion euros have already been transferred to 136,000 private projects and 11 large public-private projects, 43% of which are been managed directly by the regional governments. Catalonia is, according to the Minister, the region which has approved the largest number of projects and in particular in the area of digital competences and skills in SMEs.
According to the latest polls published by the State-run National Sociological Institute, the CIS, the socialist party could lose the regional elections of May in Extremadura and is tied with the conservative popular party in the regions of Madrid and Valencia and would retain its majority in other regions including Castilla-la-Mancha and La Rioja. Polls were not carried out in other key regions including the Canary Islands and the Baleares, where the PM’s socialist party rules in coalition with other smaller far-left regionalist parties. Support for the PM’s junior coalition partner, Podemos, is also falling, according to the CIS, and Podemos could lose all representation in five of Spain’s 15 regional governments, while support for the far-right Vox remains stable or slightly lower. Elections will not be held in the regions of Andalucia, the Basque Country, Catalonia and Galicia.
At a national level and for the general elections of the end of the year, private polling companies give the opposition popular party 31% of the votes and a four-point lead over the socialists of Pedro Sanchez. The far-right Vox remains stable at 15% of the votes and the far-left Podemos would fall to 9%. If these polls were to hold true, the popular party would be able to form a comfortable coalition with Vox, and it would be very hard for Pedro Sanchez to repeat as Prime Minister. The slump in voter support for the Prime Minister and his socialist party and in particular the far-left, can be attributed to voter discontent over the Prime Minister’s attempts at forcing a change in the judicial system and imposing changes to the legal system which favors the pro-independence actions of his junior partners in Parliament, the far-left and radical Catalan ERC party.
With the Catalan Socialist Party (PSC) and ERC one step closer to agreeing to the regional Catalan public administration budget for 2023, and changes made to the Spanish penal law so as to decriminalize crimes of sedition and significantly reduce penal sentences on misuse and misappropriation of public funds, ERC has announced that it has set itself new goals in its relations with the central Government. It’s main goal now is to reach agreement on the requirements to be met to hold a new referendum on independence.
ERC’s demands include allowing the Catalan Government to hold a referendum on independence, which is first agreed on with the central Government, and which would lead to negotiations on independence if at least 50% of Catalan voters vote in the referendum and if 55% of these voters vote in favor of independence. The age limit to vote would also be brought down to 16.
ERC has no intention to hold a referendum this year, but will push for these demands as a condition to be met if Pedro Sanchez wins the general elections at the end of the year with a slim majority which requires that he seeks support from the nationalist parties in the Basque Country, Catalonia and the Canary Islands to form a new coalition government.