The budget extension will subtract two tenths from the GDP growth in 2024

The budget extension would have a negative impact on Spain’s economic growth this yearreducing it by two tenths, according to the Foundation of Savings Banks (Funcas). This reduction would be mainly due to the effect on public consumption.

He Director of International Economic and Economic Affairs of the Funcas Foundation, Raymond Torres, explained that Spain’s GDP would also grow two tenths less due to the “reversal of the anti-inflation package measures.” Thus, Funcas foresees that The contribution of public consumption to GDP in 2024 “would be 0.4, exactly half of last year”. Therefore, its growth projections for Spain’s GDP for the current year rise to 1.8%, which represents an increase of three tenths compared to the estimates made in January. In addition, they have maintained their growth forecast for 2025 at 2%. This downward adjustment is attributed mainly due to the lower fiscal influence and the weakening of exports. However, private consumption is expected to be the main driver of growth in this period, driven by job creation and the spending of part of the savings accumulated by households in the previous year.

He general director of Funcas, Carlos Ocaña, has recognized that, despite this relatively comfortable scenario in the short term, one of the most worrying points is the weak evolution of investment. Since the start of the pandemic, investment has shown negative performance, which is especially worrying when compared to the European Union average.

Furthermore, the director of International Economic and Economic Affairs at Funcas, Raymond Torres, has highlighted two factors that suggest the possibility of a slowdown this year compared to last year. The most significant factor, according to Torres, is fiscal policy. He explained that, in a situation of budget extension, many spending items remain frozen, which can affect economic momentum. Another important factor is the reversal of the anti-inflation package measures, which will reduce disposable income for households and could temporarily increase consumer prices.

He also noted that “the start of the year has been positive” and highlighted the reactivation of investment as a “priority” to maintain a “balanced growth path.” Likewise, he warned that the “challenge” is to “reduce public debt in the medium term” and assured that “it will be very difficult to reduce it below 105%” this year.

The boost, therefore, will come from private consumption and the slight expected rebound in investment, which explains the upward revision of the growth forecast (three tenths more than in January). The Foundation also points out that The budget extension makes it necessary to expedite recourse to European funds, that are not subject to spending freeze rules, so the boost to the ‘Next Generation’ program could be somewhat greater than in 2023.

Inflation and deficit

Funcas estimates that average inflation will be 3.2% for this year and 2.3% for 2025. Torres explained that inflation would barely decrease this year, but it is expected to decrease due to adjustments in VAT. However, for next year, inflation is expected to approach the European Central Bank’s (ECB) target of 2%.

Regarding the public deficit, Funcas expects a reduction this year to 3.2% and up to 3% in 2025. Regarding interest rates, Torres anticipated an adjustment by the ECB in June, which would lead to a total adjustment of approximately 0.75 percentage points until the end of the year, with an additional point of reduction the following year. This measure is expected to provide a boost to investment, which would grow by 2.5% instead of the 1% forecast for this year.

For countries like Spain with a debt greater than 90%, European regulations require a decrease in the public debt-to-GDP ratio of at least one percentage point each year.

The unemployment rate will go down

Regarding unemployment, Torres highlighted that Funcas’ forecasts indicate the creation of around 600,000 jobs this year, followed by between 300,000 and 400,000 jobs next year. This would mean that a substantial increase in employment could reduce the unemployment rate to 10.3% by the end of 2025.

Funcas predicts that the job creation cycle will continue, which would allow the unemployment rate to decrease to 11.2% by the end of 2024, a level still considered “very high” compared to the European average. By 2025, the unemployment rate is expected to fall to 10.3% by the end of the year. However, Torres warned that this figure is still “very high compared to the European average, almost double.”

Regarding public debt, Funcas estimates that it will be reduced to approximately 106.2% this year and will fall below 105% in 2025, specifically standing at 104.9%. However, Funcas highlighted that “in a scenario of persistent weakness in current investment, the debt criterion would require an abrupt fiscal adjustment starting in 2026.”