Consumption in Spain: overcoming the worst of the pandemic
Consumption in Spain is recovering faster than in previous crises. This is highlighted in the consumption tracker produced by CaixaBank Research based on internal data (available in Spanish: Monitor de Consumo). In the month of October, our consumption indicator was already 13% higher than in the same month in 2019.
Albeit at a more moderate pace, we expect consumption growth to remain dynamic over the coming years, supported by several factors including the release of demand pent up during the pandemic, the recovery of the labour market, improved consumer confidence, accommodative financial conditions and the boost from the Next Generation EU funds. Although some factors have emerged that will take some of the shine off the recovery, such as the energy crisis and tensions in global supply chains, we expect the rate of growth in consumption to remain strong over the next two years, with an increase of 5.7% in 2022 and 3.6% in 2023.
The slump in consumption during the COVID-19 health crisis was far greater than during the financial and sovereign debt crisis of 2008-2014. This is largely because the factors that depressed consumption in these two recessionary periods are very different. During the 2008-2014 crises, the main determinants were the fall in gross disposable income and, to a lesser extent, the increase in uncertainty associated with the future economic situation.1 In contrast, during the 2020 crisis the main determining factors have been restrictions on business and mobility (see the chart below).2
- 1. See the Dossier «The recovery of consumption in Spain: reasons and outlook» in the Monthly Report for October 2017.
- 2. Contributions to the variation in real consumption are obtained from a simple first-difference estimator using ordinary least squares, where the explanatory variables (the first three expressed in real terms) are gross disposable income, financial wealth, the interest rate (12-month Euribor) and consumer confidence. Following the methodologies of the ECB and Bank of Spain, the contribution made by the restrictions is estimated as the residual of the model (corrected for its historical forecast error). See «COVID-19 and the increase in household savings: precautionary or forced?» in the ECB Economic Bulletin 06/2020, and «Household saving during the pandemic and its possible effects on the future recovery in consumption» in the Bank of Spain’s Economic Bulletin 1/2021.
Spain: determining factors for household consumption
Contribution to quarter-on-quarter change in real consumption (pp)
The lifting of most of the restrictions in Q2 2021 paved the way for a recovery in consumption,3 especially in those sectors hardest hit by the restrictions (leisure, catering and tourism), as reflected by our consumption tracker. Likewise, in 2021 this recovery has been supported by the release of the pent-up demand that accumulated during the toughest months of the pandemic, as well as by the notable improvement in both the labour market and consumer confidence, factors that will continue to drive consumption in 2022 and 2023.
Over the coming quarters, pent-up demand will play a particularly important role among high-income groups, which are the ones that generated the most excess savings during 20204 and, according to our estimates, still have the largest cushion to maintain a relatively high rate of consumption growth by their standards. Specifically, we estimate that, in 2021, they have spent less than half the excess savings they accumulated on consumption,5 so there is room for their consumption to continue to grow significantly in 2022.6
As for the labour market, we expect its recovery to consolidate, 2022 and 2023 ending with employment growth of 2.7% and 2.1%, respectively. This will be the key factor to continue underpinning growth in household income, which we expect to post a cumulative 8.5% increase over the period 2022-2023.
Another factor that will also contribute to the growth in consumption is the improvement in consumer confidence, which has recovered significantly, particularly thanks to the successful vaccination campaign. Although we do not rule out the possibility of further waves of infections, we are confident that pressure on hospitals will remain limited over the coming months thanks to the effectiveness of vaccines and the high percentage of the Spanish population that has been vaccinated. This should mean that, in the coming months, there will be no need to impose such severe restrictions on mobility and business as those in place until last spring. This is one of the main assumptions underlying our macroeconomic scenario. In this respect, one of the major risks is the possible emergence of new variants of the virus that reduce vaccine efficacy.
In addition to the three factors mentioned above, we also believe that consumption will be supported by the continuation of accommodative financial conditions as we do not expect the ECB to start raising interest rates until 2024.7 This will encourage more consumer credit in order to finance, above all, the purchase of durable goods. Finally, the European recovery plan (NGEU) will also boost consumption over the coming quarters. One of the main aims of Europe’s recovery and resilience plan is to encourage sustainable mobility and renovate housing to promote energy savings, which will also boost the consumption of durable goods such as electric cars and more energy-efficient air conditioning appliances.
- 3. For more details on which sectors have benefitted the most from this rebound in consumption, see the article «Which sectors have benefitted the most from pent-up demand?» in this Report.
- 4. See the article «Consumption and pent-up demand: Profiling the recovery’s star consumer» in this Report.
- 5. See the article «Whether to get into debt: a dilemma that depends on how much was saved during the pandemic» in this Report.
- 6. CaixaBank Research estimates that pent-up demand will contribute 1.2 pp to GDP growth in 2022.
- 7. Our 12-month Euribor forecast for 2022 and 2023 is –0.35% and –0.27%, respectively.
Although we expect the recovery in consumption to remain strong over the coming years, a few obstacles have appeared in recent months that will take some shine off it. Firstly, energy prices, both electricity and fuel, have risen sharply in the second half of the year. This increase reduces the purchasing power of households, which ultimately limits the ability of consumption to recover. Although we believe that energy prices will normalise over the course of 2022, we expect the impact on consumption growth in 2022 to be around 0.7 pp.8
Secondly, the sharp rise in international demand over the past few months has led to bottlenecks in global supply chains, restricting the capacity of supply to rally. As a result, growth in consumption will also be limited by longer delivery times for some consumer products such as vehicles, and by rising prices due to mismatches between supply and demand in some sectors. In any case, according to the latest available indicators, we believe these obstacles will start diminishing from Q2 2022 onwards, so the final impact on the recovery in consumption is expected to be limited.9
- 8. Estimated based on a semi-structural general equilibrium model with 9 estimated equations and 14 auxiliary equations which, in the short term, is determined by demand while aggregate demand and supply are equalised in the long term. For more details (in Spanish), see «Modelo semiestructural de CaixaBank Research para España», Working Paper 01/21.
- 9. According to estimates by CaixaBank Research, bottlenecks will subtract 0.3 pp from GDP growth in 2022.
All in all, the obstacles that have appeared recently will take some of the steam out of consumption’s recovery but the underlying factors supporting it are solid. We therefore expect consumption to post relatively high growth rates in both 2022 and 2023: 5.7% and 3.6%, respectively.