The global background and the Spanish macroeconomic snapshot: The energy crisis in Europe, coupled with supply chain bottlenecks worldwide, and accelerated monetary tightening are the major headwinds for the Eurozone and for the Spanish economy. The rising risk of stagflation is causing drastic cuts to growth estimates and is raising inflation forecasts simultaneously, to such an extent that GDP growth in Spain has been revised down to 4.2% for 2022 and to 1.4% for 2023 while the Eurozone is expected to grow by 2.4% in 2022 but slow to 1.3% in 2023. The inflation outlook is still persistently high: we forecast that inflation will average 8% and 7.5% in Spain and the Eurozone in 2022, respectively, while we expect a moderation for 2023, to 3.3% for Spain and 4.1% for the Eurozone.
Spain’s public finances and the trajectory of Spanish debt: The debt/GDP ratio rose to 120% in 2020 after the shock of the Covid-19 pandemic. The country’s debt and deficit sustainability face two main headwinds: a more adverse funding profile due to the monetary policy normalisation and Spanish demographics, with both factors potentially requiring more fiscal discipline.
Investment implications: While technicals for SPGB look more mixed vs other periphery countries, in the presence of a similar limited positioning for foreign investors, the focus in the short term on spreads drivers will continue to be on the next announcement from the ECB and to what extent the new backstop will be perceived as effective.