Passing tailwinds a job

The economy says goodbye to this year in better shape than expected. Global turmoil, exacerbated by conflict in the Middle East, and a cycle of interest rate increases have slowed growth, but without causing the recession we feared, at least in Spain. The economy appears to continue to resist, as indicated by a set of indicators taking the pulse of the situation in near real time (PMI surveys of purchasing managers, large-cap sales, and membership). In addition to this, the decline in the escalation in the consumer price index. But it is recommended…

The economy says goodbye to this year in better shape than expected. Global turmoil, exacerbated by conflict in the Middle East, and a cycle of interest rate increases have slowed growth, but without causing the recession we feared, at least in Spain. The economy appears to continue to resist, as indicated by a set of indicators taking the pulse of the situation in near real time (PMI surveys of purchasing managers, large-cap sales, and membership). In addition to this, the decline in the escalation in the consumer price index. However, it is advisable to put these dynamics in context before drawing conclusions for next year.

One of the main mitigating factors of monetary tightening and stagnant global trade lies in lower import costs. The goods and services we buy from abroad have become almost 9% cheaper, in total value terms (with national accounting data from Q3), practically erasing all the slack. shock Which broke out after the outbreak of war in Ukraine.

The de-escalation had two providential results. Most obviously, it has facilitated disinflation, as evidenced by the rapid deceleration in the overall CPI, which includes imported prices, in contrast to the relative stability of the core CPI, an indicator that approximates domestic paths. Thus, salaries began to gradually regain some of their purchasing power: since the second quarter, agreed salaries have increased at a rate higher than inflation, which has supported household consumption.

Second, the decline in the costs of imported supplies represents an injection of purchasing power of unexpected magnitude. This is because although import costs have fallen, our export prices have remained the same, so that we can generate more income for each unit of product exchanged abroad. This means that the so-called “terms of trade” have improved significantly, fully compensating for the deterioration caused by the conflict in Eastern Europe.

However, the benefit is temporary, as global prices stabilize, so the tailwind provided by improved terms of trade will diminish. Fortunately, the impact of lower import costs is reaching other European countries somewhat later (which is why their inflation rate has recently been lower than ours), which could help rouse the core economy from its slumber. Euro-zone. But we must also take into account that other factors that supported demand, such as excess savings, will tend to disappear.

The result is that from now on we will have little buffer to moderate the impact of monetary policy. And this is precisely the key: the ECB’s reading of a distressed situation, with inflation on a downward path, but still vulnerable to ups and downs due to the effects of reversing VAT and fuel subsidy cuts, and with salaries recovering slightly from the blow of the energy shock.

The Central Bank itself realizes that, given the extreme weakness of the European economy, corporate profits are absorbing the revaluation of salaries (specific processes in most cases, and therefore not standardized). All of this points to a low inflation scenario that will strengthen throughout the year, until it becomes possible to see favorable ground for interest rate cuts starting in the spring. There are concerns that the European Central Bank, in contrast to its North American counterpart, is not currently opening the door to a possible adjustment of its monetary tools. Let us hope in the new year that efforts to achieve clarity will arrive on time.

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