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Household consumption has resisted the blow to inflation due to savings and the strength of the labor market

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40% of Spanish households polled by the Bank of Spain before the summer expected to spend a significant amount on holidays in the next year, at most from March 2020, even before Russia’s invasion of Ukraine exceeded expectations. at the end of February. By the same token, and as a reflection of the same resistance to an uncertain inflationary shock, uncertainty over the energy crisis and war, spending on cars (about 10%) or housing was almost non-existent. changed (about 5%). It has fallen markedly, from 30% to 20% in April 2020 in the latest survey of household purchase forecasts, although this decline is due to the end of restrictions due to the pandemic and a lower proportion of telecommuting. Time spent at home.

In the European Central Bank’s (ECB) latest survey from August, Spanish households are still the ones expecting the biggest improvement in their real income (minus the loss of inflation) next year, by just over 2%. According to the last months. The same survey shows that our country and Belgium are the economies where households expect spending to increase the most over the same period, by almost 8% (here yes, as a result of price increases).

In Spain, this optimism is reflected by more data and others, which inevitably qualify. But it certainly shows that both the government’s most optimistic economic growth forecast for 2023 – 2.1% of gross domestic product (GDP) – and the most pessimistic of the Bank of Spain – 1.4% – or the International Monetary Fund (IMF) – 1.2. %—matches confidence that household spending will increase despite stifling inflation. The executive is starting to grow at 1.3% and the IMF at 1.7%.

Even BBVA, which predicts a barely 1% increase in activity next year, estimates private consumption growth of almost 1%. “High inflation, without reaching gallops, i.e. price growth rates between 5% and 10%, is not clearly classified as beneficial or negative in terms of consumption. Although most studies tend to indicate that its effect is negative or zero, that is, never positive,” reflects researcher Victor Gómez Blanco.

One of the analysis groups that stand out from this positive perspective is Caixabank Research, which foresees a 0.7% decrease in household spending in 2023. However, this bank’s recent usage monitor (measures the use of debit and credit cards. Every month) shows a 15% increase in the third quarter of this year compared to the same period in 2019. A figure that “actually indicates a weakening of consumption due to rising inflation,” compared 14% in the second quarter, as the unit defends.

The Bank of Spain has also reported a drop in consumer confidence in recent months. And notice the stark contrast between hospitality spending, which has recovered all that was lost since 2019 in this first summer without COVID restrictions, and car registrations, which are clearly on the decline, a historic sign of a recession.

Instead of sticking to the 1.3% growth in private consumption projected this month by the government and the Bank of Spain for 2023, I think it’s very important to take a deep look at what they’re forecasting. Europe’s economic outlook continues to deteriorate with no change in the next cycle. Given industrial indicators in Europe and the weakness of the euro, it is most likely that forecasts will continue to be revised downwards. For example, the indicator of the apparent consumption of construction cement stands out (an indicator that is distinguished by the expectation of the future economic cycle) – says Laura Maraval, professor of economics at the University of Alcalá.

Labor market strength

In this last line, AIRef (the independent body for fiscal responsibility) noted last week that “despite favorable employment behavior, the deterioration in purchasing power that Spanish households are experiencing as a result of the reduction in real wages is high. . In the first half of 2022, there was a decrease in compensation per actual employee [con el efecto de la inflación] to about 6%, thus exceeding the contraction of 5.2% recorded in the fourth quarter of 2012”.

In colloquial terms, families’ resistance to consumption can be described as heroic. But AIReF itself emphasizes the first key factor: “the strength of the labor market”. “The unemployment rate has decreased significantly and the wages of those with indefinite contracts have increased, and the activation of certain consumption decisions that continued in the first years of the pandemic (2020 and the first months of 2021) increase the total number. consumption”, admits economist Victor Gomez.

The government defends this argument tooth and nail. “Almost” 21 million will be employed in 2023, First Vice President and Economy Minister Nadia Calvino assured last Tuesday at a press conference after the Council of Ministers, in which the draft budget was approved. This means the creation of less than a million jobs, even though one of the most important sectors, such as tourism, is already close to record figures in 2019, as Calvino himself admitted. The government’s optimism is based on “labor reform”.

Workers are poorer with rising prices, but more workers. Even the International Monetary Fund claims unemployment will drop to 12.3%, according to the executive. In addition, some households, mostly those with higher incomes, are enjoying good savings conditions – on average they are still above pre-pandemic levels – and debt, despite the damage caused by inflation and rising interest rates. Central banks have decided to fight it.

For his part, Miguel Cardoso, Spain’s chief economist at BBVA Research, emphasizes that inflation will decrease in the coming months, “as already seen in the drop in fuel, gas or the improvement of world trade blockages”.

Storage bag

These are other key factors to rely on for consumption resistance in 2023. “The most important justification is the savings bag that families have accumulated during the pandemic,” continues Miguel Cardoso. And “despite the fact that financing is becoming more expensive, there has been a significant deleveraging process in recent years, 30% of loans are fixed-rate, and the debt term is long (a large part of refinancing does not happen in the short term), so the increase in interest rates has little effect,” the expert adds.

Of course, there is a lot of heterogeneity across household income levels. “High-income households, who have also been able to save more, and the elderly, especially those who own or own financial assets, are better off financially compared to younger people,” he admits.

Researcher Laura Maraval influences the heterogeneity, noting that “after the war in Ukraine, the expectations of spending of low-income families have fallen, while families with more resources have expectations to maintain (or even continue to increase) their consumption.”

shock measures

On the other hand, the Bank of Spain emphasizes that, for example, the consumption of electricity and fuel has decreased less than theoretical models say it should have, which can be explained by various factors. “Among them, perhaps, the expectation of the agents – households and companies – that the price change would be temporary, the fact that there were some compensatory measures on the income side for the most vulnerable groups, or the availability of a significant savings bag accumulated during the highest frequency phase of the pandemic,” the institution lists.

The government has insisted that the impact of inflation in Spain has been reduced by the three packages of measures approved so far. And unions argue that wage negotiations should be reinvigorated so that just as retirees don’t lose purchasing power or that officials have signed off on a multi-year framework for wage increases, private-sector workers are also protected.

Returning to the savings rate, it was 8.5% of total disposable income in the second quarter (watertight, seasonally adjusted). “This is a lower record than in the previous quarter (10.3%) and somewhat higher than pre-pandemic levels (7.4% on average in the second quarter from 2015 to 2019),” CaixaBank experts note.

The biggest threat to these savings is that “the fear of agents [empresas y también trabajadores] Adjust your inflation expectations [al alza] This leads to a general increase in central bank interest rates, further reducing consumption and investment and straining financial markets, reducing household wealth,” explains Victor Gómez.

And in the case of the European Central Bank (ECB), “it’s important to note that an increase in Federal Reserve rates largely forces other central banks to raise their benchmark rates due to capital outflows. Otherwise, this will happen, which will further depreciate other currencies against the dollar, and the import of oil and other raw materials will become more expensive,” the economist concludes.

Source: El Diario


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