Spain seems to be one step ahead of Europe in terms of inflation. Prices have risen earlier and more sharply, with the result that household consumption has suffered more. But it only seems a matter of time before Europe also tightens its belt.

The Spanish economy is showing signs of stagnation. Spanish GDP grew by only 0.3% in the first quarter of 2022, according to INE data. To a large extent, this meagre increase is due to the contraction of household consumption by 3.7%, the first negative rate in household consumption in the last year.

After a fall in GDP of almost 11% in 2020 due to the pandemic, a strong economic recovery was expected as restrictions were lifted, but growth in 2021 was limited to a modest 5.1% and early data for 2022 does not invite optimism: most international organisations, banks and analyst firms are already revising down their growth forecasts for this year.

Despite the recovery of the labour market, uncertainty has taken its toll on domestic consumption. As a result, macroeconomic data has not taken off at any point.

The burden of inflation

These doubts about the future of the economy have been compounded in the last year by a much more tangible element: inflation. The pandemic caused prices to be contained in 2020, which ended with a 0.5% decline in the CPI. However, since March 2021 prices have risen sharply and almost uninterruptedly.

The largest increase occurred in March this year. In just one month, prices shot up by 3%, bringing the year-on-year rate to 9.8%, the highest since the mid-1980s. And although the inflationary trend has moderated slightly in April, at 8.3%, it is still at a rate that discourages consumption.

Energy is mainly responsible for these inflation levels. It should be borne in mind that the price of electricity has risen by around 80% in one year, and fuels by more than 50%. These increases are much higher than in other European countries, especially in the case of electricity.

Risk of European contagion

Europe runs the risk of following in Spain’s footsteps in terms of consumption contraction, as the inflationary gap is narrowing. While the difference between Spanish inflation and the European Union average at the end of 2021 was 1.3%, in April it narrowed to 0.9%. Europe is no stranger to rising energy prices, which are already 40% higher than a year ago.

While inflation seems to have peaked in Spain, it is likely to continue rising in countries such as Germany, France and Italy, something that would make the recovery of the major European economies even more difficult.

We should not forget that economic stagnation is already a widespread phenomenon in Europe. In the first quarter of the year the eurozone’s GDP grew by only 0.2% and France, one of the locomotives of the European Union, surprised with a flat GDP. 

The situation may become even more complicated as the European Central Bank is expected to raise the price of money in July. This measure, aimed at curbing inflation, will further cool the economy, so that Europe seems doomed to tighten its belt.

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