A triple threat hangs over the economy
The economic gears are grinding ever tighter. Rising energy prices are pushing up production costs, while runaway inflation is holding back consumption and rising interest rates are making credit more expensive for businesses and families.
August was the month with the most expensive electricity in history in Catalonia, as the average price on the wholesale market was 307.80 euros/MWh, according to data from the Iberian Electricity Market Operator (OMIE). And this happens despite the application of the “Iberian exception” since June in Spain and Portugal, which has decoupled gas from the wholesale electricity market to reduce its price. In short, electricity has become 190% more expensive than one year ago and the price has risen by 585% compared to two years ago.
The prices of all fuels have soared because of the war in Ukraine and countries such as Germany and the Netherlands have already had to resort to coal to partly compensate for the problems with gas and oil supplies.
Rising energy prices are causing companies’ production costs to rise exponentially across Europe. The Industrial Price Index (IPRI), which measures the evolution of the prices of products manufactured in Spain and sold on the domestic market in the first stage of their commercialisation, indicates that in July 2022 they were 40% more expensive than the previous year. Of this increase, more than half is directly due to the rise of energy prices. In Germany, data for August reflect a 45% increase in industrial prices compared to the same month in 2021.
In this situation, companies are faced with the dilemma of either passing on the cost increase to the end consumer, thus running the risk of losing sales, or reducing their margins, thus also losing out. In short, there is no good decision, the optimal decision is the least bad one.
A second problem gripping the economy is runaway inflation. In Catalonia, the year-on-year variation stood at 10.2 % in August, reaching a double-digit increase for the second consecutive month.
In addition to energy, food prices have also soared, mainly due to fuel and fertiliser costs, which could increase by up to 70 % this year. Globally, agricultural commodity prices are expected to rise by 18% by 2022. And the increases are particularly affecting staples such as tomatoes, meat, oil and milk.
Sustained food shortages and high prices could lead to malnutrition problems for millions of people and popular revolts. Indeed, riots have already occurred in Sri Lanka and Peru, and countries such as Turkey and Egypt could follow in their footsteps.
However, not all the responsibility for the rise in inflation lies with food and energy, which are the products with the most volatile values: core inflation, which does not take these product categories into account, is already close to 6 % in Catalonia.
Of course, in addition to devaluing our savings, the increase in inflation means a loss of purchasing power for citizens, which hampers consumption and further strangles the market for companies. Thus, a second burden falls on the economy.
Rising interest rates
Faced with escalating inflation, most central banks have been forced to raise interest rates to cool the economy, pushed by the aggressive monetary policy of the United States, which has just raised them by 0.75 % for the third time this year. And that has traditionally led to more difficulties in Europe and financial crises in emerging markets and developing economies.
So far, the European Central Bank has raised interest rates by 1.25 % in just over two months and is expected to raise them further at its next meetings. This rise in interest rates is further stifling the economy, as it makes both the credit needed by companies to invest and innovate and consumer credit, which is essential to stimulate certain markets, more expensive.
In short, with the rise in interest rates, a third burden is falling on the gears of the economy. It is therefore not surprising that in August some 20,000 SMEs disappeared in Spain and that up to 90,000 are in technical bankruptcy, as indicated by the latest barometer of the General Council of Associations of Administrative Managers of Spain. And the forecasts for the coming months are not optimistic, as some 700,000 have liquidity problems.
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