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Spain's inflation 'third-lowest in Eurozone'...and falling
21/06/2023
INFLATION in the Eurozone has fallen slightly, but is still more than double that of Spain – the common-currency nation with the third-lowest rate.
According to the continent-wide statistics agency, Eurostat, inflation across the countries which use the euro fell from 7% to 6.1% in May, the most recent full month for which figures are available.
But Spain's own inflation rate is dramatically lower – in fact, after Belgium and Luxembourg, is the most reduced figure in the Eurozone.
As at the end of May, inflation in Spain was 2.9%, meaning residents are not suffering price increases to the same extent as those in their neighbouring countries.
Even at its 2023 peak – in April – Spain's rate of inflation was much lower than the Eurozone average is now, at 3.8%.
It does not mean consumer prices have come down – just that they have stopped rising, according to the Bank of Spain.
Only Belgium, at 2.7%, and Luxembourg, at 2%, have lower inflation than in Spain at present.
Meanwhile, Germany and Italy far exceed the Eurozone average, at 6.3% and 8.1% respectively, and France is only just below the across-the-board figure, at 6%.
Lithuania and Slovakia are experiencing the toughest time with living costs, dealing with inflation rates at above 12%.
What has triggered the inflation slowdown
Lower inflation rates in the Eurozone are not entirely due to rising interest, however. Eurostat says falling energy costs – now 1.7% lower than a year ago – are partly responsible.
Reduced prices of transport fuel, electricity and gas have also helped slow inflation in food and other consumer goods.
Although still 9.6% more expensive on average than in May 2022, food price inflation has fallen from the 13.5% seen in April this year.
As a result, underlying inflation – which excludes the effect of price-volatile commodities such as energy and non-processed food – has shrunk from 5.6% in April 2023 to 5.3% in May, down 0.4 percentage points from its record high in March of 5.7%.
Food prices have not all risen by a standard 9.6%. Shoppers in Spain have noticed that, whilst a very small number of items are no more expensive than in 2021, a significant proportion are now a third more expensive, with costs in some cases soaring by 50% or even 100%.
Spain's government acted earlier this year to cut value-added tax (IVA) on staple food items to zero, meaning that although most of these are now around 40% more expensive than in 2021, their prices have not risen for several months.
Euribor rates still rise, even as inflation falls
All this said, and despite the USA's Federal Reserve having opted to cut interest rates and the Eurozone's having entered into 'technical recession', the European Central Bank (BCE) has upped its own rates again.
Now rising from just above 3% to over 4%, the Euribor – or Eurozone interest rate – is at its highest since 2008.
And the BCE has hinted the latest hike might not even be the last.
A year ago, the Euribor was still in minus figures, meaning mortgage repayments across the common currency area have soared.
Increasing interest rates is the standard response to controlling inflation, and during the six years the Euribor was below zero, Eurozone inflation still needed to rise.
The inflationary target was 2.2%, meaning borrowers were confident that, until this was reached, their loans would continue to be cheap.
Yet the Russian invasion of Ukraine forced Eurozone inflation up to a massive 10.6% almost overnight, leading to the BCE's relatively-new chairwoman Christine Lagarde to put interest up.
BCE deputy chairman and former economy minister for Spain under the right-wing PP government, Luis de Guindos, reports that inflation figures are heading in the right direction, but that there is still a long way to go before Euribor rates can fall again.
“There's a perception that the bulk of the interest rises is now behind us, and that we're now on the last leg of the journey,” De Guindos says.
“Inflation figures in the Eurozone are showing positive progress, but we're still a long way off our target percentage.”
Christine Lagarde – former chairwoman of the International Monetary Fund (FMI), who took over at the BCE after Mario Draghi's term ended – takes a more pessimistic approach.
During her latest update on the situation, just before the weekend, Mme Lagarde said: “There are no clear signs that underlying inflation has peaked.
“Inflation is too high, and is destined to stay that way for too long.
“We're determined to reduce it to our target of 2% in the most opportune manner possible.”
What is a 'technical recession', and why Spain has escaped it
'Recession' is when economic growth falls consistently for six months or more – even if the actual effects of this have not caused any measurable negative conditions for businesses and households.
Although the term 'recession' generates widespread alarm and conjures up images of mass unemployment, company closure, falling home income and general financial struggle, a country or region is deemed to be in 'recession' if its gross domestic product (GDP), or economic output per head, has been going down for two or more quarters.
This can be temporary and due to very specific, transient factors – such as the pandemic, or problems with the transport industry, for example – or it may be very severe, leaving a country practically on its knees.
One of the reasons for the Eurozone's 'technical recession' is the shrinking growth in Germany. This central nation accounts for 29% of the common currency area's GDP, meaning financial problems it may suffer create a ripple effect.
The last two quarters saw the German GDP shrink by 0.5% and 0.3% respectively – results for the second quarter of 2023 are not yet available – and growth has also fallen in Ireland, Lithuania, Estonia, and Hungary.
Other than Ireland, which has an exceptionally-strong presence of foreign multi-national corporations based in its territory, the countries with slow growth are those which have been the most heavily impacted by the conflict in Ukraine.
Many Eurozone countries rely on Russia for fuel, although Spain is not one of these, as it has its own gas supply and a greater dependence upon solar and wind power.
Spain, by contrast, has not entered into recession. In the last two full quarters, its economy grew by 0.5%. This is far below the ideal level of GDP growth, but means Spain is in a stronger position than many of its neighbours.
The overseas sector – exports, and foreign buyers of goods and services – have helped keep Spain's economy growing, despite national demand falling due to households and companies forced to tighten their belts.
Spain's government is optimistic about how these data show its economy is 'robust', but remain cautious on the whole, given that a shrinking Germany could have a financial impact.
Motor exports, as well as summer tourism, are two key sources of income from Germany, and concerns abound that these may reduce in the short term.
'Recession' or 'stagnation'?
In general, though, the Eurozone recession is thought of by analysts as a 'stagnation' rather than a 'true' recession.
With unemployment in the Eurozone at record lows, the economic situation is not showing the classic signs of recession. The last time, in fact, that negative growth went on for more than six months – excluding during the pandemic – was the crisis of 2012 and 2013, when GDP decline was similar but jobless figures were above 12%, or well over double the current percentage.
The European Commission believes the situation will improve over the coming months, with growth at around 1.1% for 2023 as a whole and 1.6% over 2024.
Economic growth in the common currency area is expected to start to rise again over the second and third quarter of 2023, albeit much more slowly than previous longer-term forecasts showed for this period.
Falling inflation, high interest rates: The impact on Spanish household finances
Whilst price rises in Spain in general have been making life more difficult for the average earner, they have not been anywhere near as substantial as in the rest of the Eurozone – except for mortgages and credit card repayments.
With these, the dramatic increase in interest rates has hit far harder than consumer price rises – and even fuel and energy prices, thanks to government efforts to cap the latter and a now-ended scheme to subsidise the former by up to 20%.
Petrol and diesel, whilst still above the record prices seen in late 2012 – the highest they had ever been prior to the Ukraine invasion – have, nevertheless, seen a substantial drop since spring 2022.
In fact, if it was not for the Euribor increase, Spanish residents' way of life would not have been too negatively impacted for those on an average or just-below-average income.
But the cost of borrowing having shot up almost overnight at a speed never seen before in the Eurozone is taking its toll on household finances.
How this affects the property market in Spain
A typical variable-rate mortgage of €120,000 with a 20-year term will have risen by over €200 a month in the past year, leading to a record number of borrowers attempting to renegotiate their loans or 'shop around' to find banks offering a better deal.
Estate agencies have reported a slowdown in sales, other than among buyers based overseas, very high net-worth clients, and holiday-home owners.
They believe those who would otherwise be seeking to move house, or to buy their first home, have largely decided to hold off until Eurozone inflation comes down enough for the BCE to lower interest rates again.
Next year may be easier, especially in Spain, says European Commission
Forecasts for inflation this and next year in the Eurozone were reviewed in mid-May by the European Commission, which has now released its report.
The European Union's civil service predicts price rises will continue at around 5.8% for the rest of 2023, but will fall to 2.8% in 2024.
For Spain, specifically, the outlook is far more optimistic: This year's retail prices index (RPI) will show a consistent 4% rise, with price increases shrinking to 2.7% in 2024.
It remains to be seen whether rocketing mortgage and credit card repayments affect the figures in Spain, given that their increases are disproportionately high compared with all other price rises in the country.
Related Topics
INFLATION in the Eurozone has fallen slightly, but is still more than double that of Spain – the common-currency nation with the third-lowest rate.
According to the continent-wide statistics agency, Eurostat, inflation across the countries which use the euro fell from 7% to 6.1% in May, the most recent full month for which figures are available.
But Spain's own inflation rate is dramatically lower – in fact, after Belgium and Luxembourg, is the most reduced figure in the Eurozone.
As at the end of May, inflation in Spain was 2.9%, meaning residents are not suffering price increases to the same extent as those in their neighbouring countries.
Even at its 2023 peak – in April – Spain's rate of inflation was much lower than the Eurozone average is now, at 3.8%.
It does not mean consumer prices have come down – just that they have stopped rising, according to the Bank of Spain.
Only Belgium, at 2.7%, and Luxembourg, at 2%, have lower inflation than in Spain at present.
Meanwhile, Germany and Italy far exceed the Eurozone average, at 6.3% and 8.1% respectively, and France is only just below the across-the-board figure, at 6%.
Lithuania and Slovakia are experiencing the toughest time with living costs, dealing with inflation rates at above 12%.
What has triggered the inflation slowdown
Lower inflation rates in the Eurozone are not entirely due to rising interest, however. Eurostat says falling energy costs – now 1.7% lower than a year ago – are partly responsible.
Reduced prices of transport fuel, electricity and gas have also helped slow inflation in food and other consumer goods.
Although still 9.6% more expensive on average than in May 2022, food price inflation has fallen from the 13.5% seen in April this year.
As a result, underlying inflation – which excludes the effect of price-volatile commodities such as energy and non-processed food – has shrunk from 5.6% in April 2023 to 5.3% in May, down 0.4 percentage points from its record high in March of 5.7%.
Food prices have not all risen by a standard 9.6%. Shoppers in Spain have noticed that, whilst a very small number of items are no more expensive than in 2021, a significant proportion are now a third more expensive, with costs in some cases soaring by 50% or even 100%.
Spain's government acted earlier this year to cut value-added tax (IVA) on staple food items to zero, meaning that although most of these are now around 40% more expensive than in 2021, their prices have not risen for several months.
Euribor rates still rise, even as inflation falls
All this said, and despite the USA's Federal Reserve having opted to cut interest rates and the Eurozone's having entered into 'technical recession', the European Central Bank (BCE) has upped its own rates again.
Now rising from just above 3% to over 4%, the Euribor – or Eurozone interest rate – is at its highest since 2008.
And the BCE has hinted the latest hike might not even be the last.
A year ago, the Euribor was still in minus figures, meaning mortgage repayments across the common currency area have soared.
Increasing interest rates is the standard response to controlling inflation, and during the six years the Euribor was below zero, Eurozone inflation still needed to rise.
The inflationary target was 2.2%, meaning borrowers were confident that, until this was reached, their loans would continue to be cheap.
Yet the Russian invasion of Ukraine forced Eurozone inflation up to a massive 10.6% almost overnight, leading to the BCE's relatively-new chairwoman Christine Lagarde to put interest up.
BCE deputy chairman and former economy minister for Spain under the right-wing PP government, Luis de Guindos, reports that inflation figures are heading in the right direction, but that there is still a long way to go before Euribor rates can fall again.
“There's a perception that the bulk of the interest rises is now behind us, and that we're now on the last leg of the journey,” De Guindos says.
“Inflation figures in the Eurozone are showing positive progress, but we're still a long way off our target percentage.”
Christine Lagarde – former chairwoman of the International Monetary Fund (FMI), who took over at the BCE after Mario Draghi's term ended – takes a more pessimistic approach.
During her latest update on the situation, just before the weekend, Mme Lagarde said: “There are no clear signs that underlying inflation has peaked.
“Inflation is too high, and is destined to stay that way for too long.
“We're determined to reduce it to our target of 2% in the most opportune manner possible.”
What is a 'technical recession', and why Spain has escaped it
'Recession' is when economic growth falls consistently for six months or more – even if the actual effects of this have not caused any measurable negative conditions for businesses and households.
Although the term 'recession' generates widespread alarm and conjures up images of mass unemployment, company closure, falling home income and general financial struggle, a country or region is deemed to be in 'recession' if its gross domestic product (GDP), or economic output per head, has been going down for two or more quarters.
This can be temporary and due to very specific, transient factors – such as the pandemic, or problems with the transport industry, for example – or it may be very severe, leaving a country practically on its knees.
One of the reasons for the Eurozone's 'technical recession' is the shrinking growth in Germany. This central nation accounts for 29% of the common currency area's GDP, meaning financial problems it may suffer create a ripple effect.
The last two quarters saw the German GDP shrink by 0.5% and 0.3% respectively – results for the second quarter of 2023 are not yet available – and growth has also fallen in Ireland, Lithuania, Estonia, and Hungary.
Other than Ireland, which has an exceptionally-strong presence of foreign multi-national corporations based in its territory, the countries with slow growth are those which have been the most heavily impacted by the conflict in Ukraine.
Many Eurozone countries rely on Russia for fuel, although Spain is not one of these, as it has its own gas supply and a greater dependence upon solar and wind power.
Spain, by contrast, has not entered into recession. In the last two full quarters, its economy grew by 0.5%. This is far below the ideal level of GDP growth, but means Spain is in a stronger position than many of its neighbours.
The overseas sector – exports, and foreign buyers of goods and services – have helped keep Spain's economy growing, despite national demand falling due to households and companies forced to tighten their belts.
Spain's government is optimistic about how these data show its economy is 'robust', but remain cautious on the whole, given that a shrinking Germany could have a financial impact.
Motor exports, as well as summer tourism, are two key sources of income from Germany, and concerns abound that these may reduce in the short term.
'Recession' or 'stagnation'?
In general, though, the Eurozone recession is thought of by analysts as a 'stagnation' rather than a 'true' recession.
With unemployment in the Eurozone at record lows, the economic situation is not showing the classic signs of recession. The last time, in fact, that negative growth went on for more than six months – excluding during the pandemic – was the crisis of 2012 and 2013, when GDP decline was similar but jobless figures were above 12%, or well over double the current percentage.
The European Commission believes the situation will improve over the coming months, with growth at around 1.1% for 2023 as a whole and 1.6% over 2024.
Economic growth in the common currency area is expected to start to rise again over the second and third quarter of 2023, albeit much more slowly than previous longer-term forecasts showed for this period.
Falling inflation, high interest rates: The impact on Spanish household finances
Whilst price rises in Spain in general have been making life more difficult for the average earner, they have not been anywhere near as substantial as in the rest of the Eurozone – except for mortgages and credit card repayments.
With these, the dramatic increase in interest rates has hit far harder than consumer price rises – and even fuel and energy prices, thanks to government efforts to cap the latter and a now-ended scheme to subsidise the former by up to 20%.
Petrol and diesel, whilst still above the record prices seen in late 2012 – the highest they had ever been prior to the Ukraine invasion – have, nevertheless, seen a substantial drop since spring 2022.
In fact, if it was not for the Euribor increase, Spanish residents' way of life would not have been too negatively impacted for those on an average or just-below-average income.
But the cost of borrowing having shot up almost overnight at a speed never seen before in the Eurozone is taking its toll on household finances.
How this affects the property market in Spain
A typical variable-rate mortgage of €120,000 with a 20-year term will have risen by over €200 a month in the past year, leading to a record number of borrowers attempting to renegotiate their loans or 'shop around' to find banks offering a better deal.
Estate agencies have reported a slowdown in sales, other than among buyers based overseas, very high net-worth clients, and holiday-home owners.
They believe those who would otherwise be seeking to move house, or to buy their first home, have largely decided to hold off until Eurozone inflation comes down enough for the BCE to lower interest rates again.
Next year may be easier, especially in Spain, says European Commission
Forecasts for inflation this and next year in the Eurozone were reviewed in mid-May by the European Commission, which has now released its report.
The European Union's civil service predicts price rises will continue at around 5.8% for the rest of 2023, but will fall to 2.8% in 2024.
For Spain, specifically, the outlook is far more optimistic: This year's retail prices index (RPI) will show a consistent 4% rise, with price increases shrinking to 2.7% in 2024.
It remains to be seen whether rocketing mortgage and credit card repayments affect the figures in Spain, given that their increases are disproportionately high compared with all other price rises in the country.
Related Topics
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