Oriol Aspachs (CaixaBank Research) | The outbreak of war in Ukraine came at a time when things were looking good for the Spanish economy. Economic activity gained momentum over the past year, growing a whopping 5.2% yoy in Q4. In addition, the effects of the new wave of infections caused by the Omicron variant were less than feared. the high proportion of the vaccinated population the pressure on the hospitals could be kept within limits and we could finally look to the future with optimism. It appeared as if we would enter a new phase of the pandemic in the coming months, in which we would be able to lead more normal lives again and in which the economic recovery would solidify.
Alongside these encouraging prospects was the Use of NGEU fundswhich should pick up speed in the coming months, This will ensure a surge in growth of well over 1 percentage point this year. Savings accumulated at the peak of the pandemic were expected to further boost consumption. International tourism, which had held up much better than expected in December and January, was already showing signs of recovery. Internet searches for holidays in Spain showed significant growth and indicated a very good summer season. And it was expected that the bottlenecks that were limiting the recovery in international trade flows would gradually ease. Given this outlook, few doubted that growth could top a good 5% this year.
But, the war that has broken out in Ukraine now makes it very difficult to predict the course of economic activity, but with each passing day, it seems less and less likely that growth will reach 5%. Given the high level of uncertainty It is still premature to outline a new macroeconomic scenario. The severity of the impact of the conflict depends on its duration, its geographic scope, and the sanctions and counter-sanctions imposed. What we can do is identify the main channels through which it will affect the Spanish economy and offer some metrics that will allow us to gauge its sensitivity.
The main effect will undoubtedly come from the sharp rise in energy prices. Net imports of gas and oil amounted to almost 25 billion euros last year. Although the bulk of these imports are not from Russia, as prices are set internationally, the sharp increase will have a direct impact that could prove significant if this price increase continues over time. As a benchmark, if the oil and gas price ends the year at an average price similar to what the futures markets saw in late February and early March (with oil at around $105 per barrel and gas at around €120/MWh), then GDP growth would likely be a little over 1 point below what we had expected before the conflict erupted. The impact may be significant, but fortunately the baseline for the growth rate was relatively high.
Also of concern is the rise in inflation that could occur as a result of rising energy prices. We have seen the upward pressure stemming primarily from higher oil, gas and electricity prices spill over into the rest of the consumer goods basket over the last few months. In January, more than 60% of the goods that make up the consumer price index have already recorded price increases of more than 2% compared to the previous year. If energy prices end up staying at the high levels indicated by futures markets, inflation could reach around 7% on average this year.
Apart from the overall effect on growth and inflation, there are some sub-sectors that are being hit particularly hard by the current circumstances. On the one hand, those who use significant amounts of energy in their production processes and will therefore be significantly affected by the price increase. Examples from the manufacturing sector are the auxiliary construction, metallurgy and wood industries. The agri-food sector will also suffer. She will directly suffer due to the high imports from Russia and Ukraine of grains (especially corn), sunflower oil (which is used, for example, in canned foods and in all kinds of processed foods). Russia and Ukraine account for 80% of world exports) and mineral fertilizers. In addition, the war in Ukraine is leading to a sharp increase in the price of agricultural commodities, which will also have a strong impact on the agricultural and food sector.
Given this situation, a coordinated fiscal response at European level must once again play a key role. It is important to support the sectors most affected by high energy and other commodity prices. Not only will this try to minimize the impact on employment, but it will also help to prevent the increase in their inputs from being reflected in final prices, thereby easing inflationary pressures. In the face of a shock of this type and magnitude, it is also imperative to act decisively to protect the most vulnerable households. Finally, that urgent change of the energy model to a more sustainable oneboth from an environmental and geopolitical point of view, must be accelerated.
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