The economy says goodbye to the year in better shape than anticipated. Global turbulence, exacerbated by the conflict in the Middle East, and the cycle of interest rate increases, have slowed growth, but without causing the much feared recession, at least in Spain. The economy seems to continue resisting, as can be seen from the handful of indicators that take the pulse of the situation in quasi-real time (PMI surveys of purchasing managers, sales of large companies, membership). And to this is added the de-escalation of the CPI. It is advisable, however, to contextualize these dynamics before drawing conclusions for next year.
One of the main mitigating factors of monetary tightening and the stagnation of world trade lies in the decline in imported costs. The goods and services we buy abroad have become cheaper by almost 9%, in aggregate terms (with national accounting data for the third quarter), practically erasing all the shock that was unleashed after the outbreak of the war in Ukraine.
The de-escalation has had two providential consequences. The most obvious is that it has facilitated disinflation, as evidenced by the rapid deceleration of the total CPI, which includes imported prices, in contrast to the relative persistence of the core CPI, an indicator that approximates internal trajectories. This is how, little by little, salaries have been recovering some purchasing power: since the second quarter, agreed salaries have increased at a rate higher than inflation, supporting household consumption.
Secondly, the decrease in the costs of imported supplies represents an injection of purchasing power of an unexpected magnitude. This is because, while import costs have plummeted, the price of our exports has remained the same, so that we generate more income for each unit of product exchanged abroad. That is to say, the so-called “terms of trade” has improved drastically, completely compensating for the deterioration resulting from the conflict in Eastern Europe.
However, the benefit is temporary, since international prices are stabilizing, so the tailwind provided by the improvement in the terms of trade will diminish. Fortunately, the impact of lower imported costs is arriving with a certain delay in other European countries (which is why their inflation rate has recently been below ours), something that could help to wake up from their lethargy the economy of the central core of the euro zone. But we must also take into account that other factors that have sustained demand, such as surplus savings, will tend to disappear.
The result is that, from now on, we will have few cushions to cushion the impact of monetary policy. And that is precisely the key: the ECB’s reading of a faltering situation, with inflation on a downward trajectory, but still subject to ups and downs due to the effects of the reversal of VAT cuts and fuel subsidies, and with salaries that recover slightly from the blow of the energy shock.
The central bank itself recognizes that, given the extreme weakness of the European economy, business profits are absorbing the revaluation of salaries (specific processes in most cases, and therefore not consolidated). All of this points to a scenario of disinflation that will strengthen over the course of the year, so that a favorable terrain for cutting interest rates could be glimpsed starting in the spring. There is concern that the ECB, unlike its North American counterpart, is not opening the door at the moment to a possible adjustment of its monetary instruments. Let us hope for the new year that the effort for lucidity arrives on time.