THE ECONOMIC SETTING FOLLOWING THE INVASION OF UKRAINE AND THE ECONOMIC POLICY RESPONSE - Pablo Hernández de Cos Governor
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THE ECONOMIC SETTING FOLLOWING THE INVASION OF UKRAINE AND THE ECONOMIC POLICY RESPONSE Pablo Hernández de Cos Governor INSTITUCIÓN FUTURO – 20TH ANNIVERSARY Pamplona 29 March 2022
BEFORE THE WAR, THE EUROPEAN AND GLOBAL ECONOMIES WERE GRADUALLY
RECOVERING, ALBEIT UNEVENLY ACROSS COUNTRIES AND ECONOMIC SECTORS…
Before the start of the invasion, analyst consensus forecasts broadly coincided in expecting a first quarter in which
economic activity would decelerate somewhat as a consequence of the negative, but limited, impact of the Omicron variant.
For the rest of the year, assuming an improvement in the pandemic, further progress in the recovery was expected,
underpinned by a decline in uncertainty, the gradual disappearance of bottlenecks, the maintenance of favourable financing
conditions and, in Europe, the gradual implementation of NGEU.
REAL GDP WEEKLY COVID-19 COMPOSITE OUTPUT PMIs
(2019 Q4 = 100) HOSPITALISATIONS/MILLION INHABITANTS
Diffusion index. 50 = neutral mark.
105 350 65
300
100
60
250
95
200 55
90
150
50
85 100
50 45
80
0
75 Jun-21 Sep-21 Dec-21 Mar-22 40
2019 2020 2020 2020 2020 2021 2021 2021 2021 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 SPAIN GERMANY ITALY FRANCE
EURO AREA GERMANY FRANCE EURO AREA GERMANY FRANCE
ITALY SPAIN ITALY SPAIN
Sources: Eurostat, IHS Markit and Our World in Data. Latest data: 2021 Q4 (GDP), February 2022 (PMIs), 3-6 March (hospitalisations).
2… AGAINST A BACKDROP OF SOARING INFLATION DUE TO BASE EFFECTS,
BOTTLENECKS AND GAS MARKET STRAINS
The rise in inflation has surprised on the upside due to both its strength and its persistence, including
in the early months of 2022.
HICP AND CONTRIBUTIONS
Year-on-year rate of change (%) and pp
8
6
4
2
0
-2
-4
Aug-20
Nov-20
Aug-21
Nov-21
Aug-20
Nov-20
Aug-21
Nov-21
Feb-20
Feb-21
Feb-22
Feb-20
Feb-21
Feb-22
May-20
May-21
May-20
May-21
EURO AREA SPAIN
5
0
-5 ENERGY FOOD HICP EXCL. ENERGY AND FOOD HICP
2019 2020 2021 2022
Sources: Banco de España, Eurostat and INE. Latest observation: February 2022.
3POTENTIAL IMPACT OF THE WAR IN UKRAINE: MAIN CHANNELS
• Russia and, to a lesser extent, Ukraine are among the main producers of certain energy and non-energy commodities.
• Europe is highly dependent on imports of some of these products: Russia accounted for some 20% of total euro area oil
imports and some 35% of total euro area gas imports in 2020. In 2019, only 6% of Spain’s energy imports (4.5% of total
Commodities
energy consumption) came from Russia, but this figure is much higher for countries such as Germany (17%) and Italy (22%).
• A hypothetical reduction in, or cut to, supply from Russia could have a significant impact on the European economy.
• Indeed, oil, natural gas and other non-energy commodity prices have already risen sharply.
• Direct financial exposure to Russia and Ukraine is generally very limited among European firms and banks (especially, once
Finance again, among Spanish ones).
• Initially, financial market volatility increased and financing conditions tightened.
• European countries’ direct trade exposure to Russia is relatively low and smaller in Spain. Yet the indirect effects may
also be considerable, particularly amid sanctions.
• In 2019 euro area exports of goods to Russia and Ukraine accounted for 1.6% and 0.3%, respectively, of its total goods
Trade
exports. Spain’s exports of goods to Russia and Ukraine accounted for 0.7% and 0.2%, respectively, of its total, whereas the
relative dependence on imports from Russia stood at 1.1% in 2019 (0.5% in the case of Ukraine, although this figure was
higher for certain primary products).
• Households and firms will have difficulty foreseeing future economic developments, particularly regarding their own
Confidence/ incomes. This will affect their consumption and investment decisions.
uncertainty • Several simulation exercises carried out internally at the Banco de España suggest that, in some particularly acute scenarios as
to the severity and duration of the conflict, GDP losses through this channel could be significant.
4ENERGY AND NON-ENERGY COMMODITY PRICES HAVE RISEN SIGNIFICANTLY AS A
RESULT OF THE INVASION OF UKRAINE
OIL PRICE AND FUTURES GAS PRICE AND FUTURES SOME COMMODITY PRICES
$/barrel €/MWh 100 = 4 January 2021 23 February 100
140 250 330
90
120
200 280 80
100 70
150 230 60
80
50
60 40
100 180
30
40
130 20
50
20
10
0 80 0
0
2021 2022 2023 2024 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22
2021 2022 2023 2024
BRENT GAS (DUTCH MARKET)
LATEST FUTURES LATEST FUTURES
FUTURES AT 23 FEBRUARY ALUMINIUM NICKEL WHEAT
FUTURES AT 23 FEBRUARY
FUTURES AT 8 MARCH FUTURES AT 7 MARCH
Source: Refinitiv. Latest update: 11 March 2022.
5COMMODITIES CHANNEL: RUSSIA IS THE EURO AREA’S MAIN OIL AND GAS
SUPPLIER, BUT WITH HIGH CROSS-COUNTRY HETEROGENEITY
RUSSIA’S SHARE OF THE NATIONAL IMPORTS OF OIL AND NATURAL GAS FROM OUTSIDE THE EU. 2021 H1.
Oil Natural gas
Russia's share (%) of the Russia's share (%) of the
Percentage (%) of final Percentage (%) of final energy
national imports from outside national imports from
energy consumption consumption
the EU outside the EU
Euro area 36.1 23.7
Spain 45.0 0-25 19.1 0-25
Germany 34.9 25-50 26.8 50-75
France 37.1 0-25 20.6 25-50
Italy 31.3 0-25 30.9 25-50
Finland 23.7 75-100 3.0 75-100
Sources: Finlands Bank and Eurostat.
6FINANCE CHANNEL: AFTER THE WAR’S STRONG INITIAL NEGATIVE IMPACT ON THE
MARKETS, THE SITUATION HAS RETURNED TO NORMAL, SOMEWHAT LESS IN EUROPE
GLOBAL UNCERTAINTY (31/12/2020 = 100) STOCK MARKETS (31/12/2020 = 100) 10-YEAR SOVEREIGN YIELD SPREADS AGAINST
GERMANY (bp)
220 130 230
Greece
125
200
S&P
IVG 120
180 180
115
160 EUROSTOXX
110 IBEX
140 130
105 Italy
120
100
Spain
100 80
95
80 90 NIKKEI
Portugal
85 30 0
60
Source: Bloomberg
7TRADE CHANNEL: THE EU’S DIRECT TRADE EXPOSURE TO RUSSIA AND UKRAINE IS LOW, BUT THE
INDIRECT EFFECTS MAY BE CONSIDERABLE. BOTTLENECKS HAVE INCREASED RECENTLY
EXPORTS TO RUSSIA VALUE ADDED GENERATED IN RUSSIA DELIVERY TIMES, MANUFACTURING
(Value added generated on exports to Russia, ON EUROPEAN IMPORTS, 2018 Diffusion index
by exporting industry, 2018) 50 = neutral mark
% of GDP % of GDP
0,8 1,6 50
0,7 1,4 45
Decrease in delivery
1,2 40 times
0,6
0,5 1,0 35
0,4 0,8 30
0,3 0,6 25
0,2 0,4 20
0,1 0,2 15
0,0 0,0 10
EU-27
EURO
ITALY
SPAIN
FRANCE
GERMANY
EU-27
ITALY
SPAIN
EURO
FRANCE
GERMANY
Jan-21 Apr-21 Jul-21 Oct-21 Jan-22
AREA
AREA
EURO AREA
OTHER SECTORS OTHERS
TRANSPORTATION AND HOSPITALITY METALS GERMANY
TRANSPORT EQUIPMENT COKE AND REFINED PETROLEUM PRODUCTS
MACHINERY FRANCE
CHEMICALS MINING, ENERGY
Sources: Eurostat, OECD TiVA and IHS Markit.
8THE WAR IN UKRAINE COULD HAVE GREATER ECONOMIC REPERCUSSIONS THROUGH
THE CONFIDENCE CHANNEL FOR THE EURO AREA…
Consumer confidence has already deteriorated sharply in the euro area, according to the European
Commission’s indicators.
EURO AREA. CONSUMER CONFIDENCE AND PRIVATE CONSUMPTION EURO AREA. CONSUMER CONFIDENCE AND GDP
%
% Balance indicator Balance indicator
16 0 16 0
12 -3 12 -3
8 8
-6 -6
4 4
-9 -9
0 0
-12 -12
-4 -4
-15 -15
-8 -8
-18 -18
-12 -12
-16 -21 -21
-16
-20 -24 -20 -24
Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Mar-96 Mar-99 Mar-02 Mar-05 Mar-08 Mar-11 Mar-14 Mar-17 Mar-20
PRIVATE CONSUMPTION (Year-on-year growth)
GDP (YEAR-ON-YEAR CHANGE) CONSUMER CONFIDENCE (R-H SCALE)
CONFIDENCE INDICATOR (r-h scale)
LONG-TERM MEAN 2000 - 2020 (r-h scale)
Source: European Commission. Latest data: March 2022 (flash estimate).
9…AND FOR SPAIN
ECONOMIC SENTIMENT IN SPAIN (DENSI) ECONOMIC POLICY UNCERTAINTY IN SPAIN (EPU INDEX)
Change Change
0,0 1,8
1,6
-0,5 1,4
1,2
-1,0
1,0
0,8
-1,5
0,6
0,4
-2,0
0,2
-2,5 0,0
-0,2
-3,0 -0,4
1 7 13 19 25 31 37 43 49 1 7 13 19 25 31 37 43 49
Days Days
Ukraine crisis COVID-19 crisis Crisis
Debt de
crisis
Deuda Crisis
Financial
Financiera
crisis
Sources: Banco de España, GPR, EPU, Refinitiv and Factiva.
The DENSI and the EPU index are constructed drawing on the “economic sentiment” and the “economic policy uncertainty” contained in the articles published in Spain’s main newspapers. The DENSI takes into account the difference between
the number of articles containing keywords related to potential upturns in economic activity in the short term and the number of those containing keywords related to potential downturns in economic activity in the short term, while the EPU
index is based on the number of articles on economic policy uncertainty.
10EURO AREA MANUFACTURING AND SERVICES PMIs FELL IN MARCH
EURO AREA COMPOSITE PMI MANUFACTURING PMI SERVICES PMI
Diffusion index Diffusion index Diffusion index
50 = neutral mark 50 = neutral mark 50 = neutral mark
70 70 70
65 65 65
60 60 60
55 55 55
50 50 50
45 45 45
40 40 40
Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22
OUTPUT
EMPLOYMENT
NEW BUSINESS
EURO AREA GERMANY FRANCE
NEW BUSINESS FROM OVERSEAS
Source: IHS Markit. Latest observation: March flash PMIs.
11IN SPAIN, LARGE ENTERPRISES’ RETAIL SALES ARE STILL SHOWING NO SIGNS OF
SLOWING DOWN, PERHAPS AFFECTED BY STOCKPILING
RETAIL SALES BY FIRMS USING THE IMMEDIATE TURNOVER OF HOSPITALITY FIRMS USING THE
SUPPLY OF VAT INFORMATION SYSTEM IMMEDIATE SUPPLY OF VAT INFORMATION SYSTEM
(14-day moving average) (14-day moving average)
% %
35 40
25 20
15 0
5 -20
-5 -40
-15 -60
-25 -80
-35 -100
31-01-20
31-03-20
31-05-20
31-07-20
30-09-20
30-11-20
31-01-21
31-03-21
31-05-21
31-07-21
30-09-21
30-11-21
31-01-22
31-01-20
31-03-20
31-05-20
31-07-20
30-09-20
30-11-20
31-01-21
31-03-21
31-05-21
31-07-21
30-09-21
30-11-21
31-01-22
CHANGE VS 2019 CHANGE VS 2019
Source: Agencia Estatal de Administración Tributaria, drawing on the returns filed with its Immediate Supply of VAT Information System by firms engaging mainly in retail trade and hospitality. CPI-deflated data. Latest
figure available: 8 March 2022.
12IN ANY EVENT, THE ENERGY SHOCK WILL FORESEEABLY HAVE A NOTICEABLE IMPACT ON
ACTIVITY, WHICH WILL DEPEND ON THE SHOCK’S INTENSITY AND DURATION
IMPACT ON GDP OF A 10% INCREASE IN GAS IMPACT ON GDP OF A 10% INCREASE IN OIL
PRICES FOR ONE YEAR PRICES FOR ONE YEAR
pp deviation from baseline scenario pp deviation from baseline scenario
0
0,1
-0,005
-0,01 0,05
-0,015
0
-0,02
-0,025 -0,05
-0,03
-0,035 -0,1
-0,04
-0,15
-0,045
-0,05 -0,2
Year 1
Year 2
Year 3
Year 1
Year 2
Year 3
Year 1
Year 2
Year 3
Year 1
Year 2
Year 3
Year 1
Year 2
Year 3
Year 1
Year 2
Year 3
Year 1
Year 2
Year 3
Year 1
Year 2
Year 3
Year 1
Year 2
Year 3
Year 1
Year 2
Year 3
Euro area Spain Germany France United Euro area Spain Germany France United
States States
Source: Banco de España.
13THE IMPACT WILL BE HIGHLY HETEROGENEOUS ACROSS HOUSEHOLDS
AND SECTORS
PROPORTION OF SPENDING ON FOOD AND ELECTRICITY, GAS AND
GAS AND ELECTRICITY CONSUMPTION (% OF OUTPUT)
OTHER FUELS
25% 14
20% 12
15%
10
10%
8
5%
6
0%
Age < 65
Age > 65
Higher education
Household members 4
Secondary education or below
Income < 25th percentile
Income > 75th percentile
4
2
0
DIRECT INDIRECT
ELECTRICITY, GAS AND OTHER FUELS FOOD
Source: Banco de España. Source: OECD. Inter-Country Input-Output (ICIO).
14OVERALL, THE WAR REPRESENTS A NEW AND FORESEEABLY HIGHLY SIGNIFICANT SHOCK, WITH
ADVERSE CONSEQUENCES IN TERMS OF A WEAKER ECONOMIC PERFORMANCE AND GREATER
INFLATIONARY PRESSURES
As regards the scale of the impact, the estimates are subject to extraordinary uncertainty. The ECB has drawn up three
scenarios, and euro area GDP growth for 2022 has been revised downwards, compared with the December projections, by
between 0.5 pp (to 3.7%) and 1.9 pp (to 2.3%), and the average inflation rate for 2022 has been revised upwards, again
compared with the December projections, by between 1.9 pp (to 5.1%) and 3.9 pp (to 7.1%).
HEADLINE INFLATION IN EURO AREA REAL GDP IN EURO AREA
Annual rate of change, %
%
8 6
7
5
6
4
5
4 3
3
2
2
1
1
0 0
21 22 23 24 21 22 23 24
BASELINE SCENARIO SEVERE SCENARIO BASELINE SCENARIO SEVERE SCENARIO
Source: ECB (March 2022 projections).
15A STRONG EUROPEAN RESPONSE IS NEEDED
Boosting • In the short term, action should focus on providing support to the most vulnerable firms and cohorts (temporarily
strategic easing the State aid framework for the business sector, establishing certain temporary limits on retail electricity
autonomy and prices, and increasing storage).
alleviating the • Over the medium term, Europe’s strategic autonomy in both energy and defence needs to be boosted. In
impact of the energy, by further diversifying suppliers and reducing reliance on fossil fuels more swiftly.
crisis
• Like the pandemic, the armed conflict represents a highly adverse, exogenous shock common to all European
economies, but potentially one that will have asymmetric effects across countries, sectors and firms, given that the
Mutualising the levels of exposure to and dependence on the Russian and Ukrainian economies vary widely, and the starting
cost positions also differ across countries.
• Joint European action, through the pooling of budgetary resources, is once again the most effective means
of funding the public expenditure arising as a result of the invasion.
• It should prevent the war from being a source of financial fragmentation in Europe.
• Creation of a permanent central fiscal capacity in the euro area.
Accelerating • Creation of a European safe asset (one step forward in this regard is the pan-European bond issuances to finance
European NGEU) and deeper capital market integration in the euro area.
integration • Completion of the banking union: establishing a European deposit insurance scheme and a common framework
for resolving systemic crises.
16AGAINST A BACKDROP OF HIGH INFLATIONARY PRESSURES, A FURTHER STEP HAS BEEN TAKEN TOWARDS NORMALISING
MONETARY POLICY. HOWEVER, GIVEN THE ENORMOUS UNCERTAINTY, THIS WAS COMBINED WITH GREATER FLEXIBILITY
AND OPTIONALITY IN OUR ACTIONS TO ENABLE US TO REACT TO THE DATA
• The decisions weigh the different risks to the price stability target in the current context:
• On one hand, the new shock drives up the inflation dynamic in the near term and increases the probability of second-round effects
and, therefore, of these inflationary pressures extending into the medium term.
• On the other, the war will have an adverse impact on growth, which could be very significant, particularly in the short term and in a setting
in which the euro area economy remains well short of its potential level. This could reduce inflationary pressures in the medium term,
which is the relevant time horizon for monetary policy.
• Under all of the scenarios analysed, inflation is expected to gradually decline and stabilise at levels close to our 2% target in 2024.
• Various indicators of long-term inflation expectations drawn from financial markets and surveys are also anchored at around 2%,
once adjusted for risk premia.
• There is less of a need to reinforce the accommodative stance through net asset purchases: the monthly purchases under the APP have been
reduced for Q2 and the calibration for Q3 will depend on developments in the economic outlook.
• The data-dependent nature of the decisions has been underlined and the flexibility and optionality in the use of instruments has increased:
• The measures needed to ensure price stability and financial stability will be adopted.
• If in the coming months new data support the expectation that the medium-term inflation outlook will not weaken, net asset purchases under
the APP will end in Q3. However, should the medium-term inflation outlook change, the net asset purchase plan will be revised (in terms of
both its amount and its duration).
• The possible time interval between the end of net purchases and the point at which interest rates start to be raised has been
widened.
• Interest rate adjustments will be gradual.
• Need to prevent fragmentation with a flexible reinvestment of debt repayments under the PEPP or, if applicable, with alternative
instruments.
17MARKET EXPECTATIONS OF INTEREST RATE HIKES WERE BROUGHT FORWARD IN DECEMBER
2021
EURO AREA: INSTANTANEOUS FORWARD €STR OIS CURVE
%
1,2
1,0
0,8
0,6
0,4
0,2
0,0
-0,2
-0,4
-0,6
-0,8
Dec-2021 Dec-2022 Dec-2023 Dec-2024 Dec-2025 Dec-2026
15/12/2021 21/03/2022
Sources: Refinitiv Datastream and Banco de España.
18NATIONAL ECONOMIC POLICY RESPONSES
• Granular responses targeting the most vulnerable households, firms and sectors.
• The measures need to be temporary and selective, given the notable increase in budgetary imbalances during the
pandemic and the current high inflation, avoiding an across-the-board fiscal impulse.
• It should be accompanied by the timely design and, once the recovery takes hold, the implementation of a medium-
National fiscal term consolidation programme that enables the high public debt to be gradually reduced.
policy • Implementation of a comprehensive and ambitious set of reforms to address our structural problems and raise
potential output, which would also help reduce our public debt.
• Acceleration of the NGEU projects and reforms.
• As part of the incomes agreement, the widespread use of automatic indexation clauses in the expenditure items
that might further fuel the current inflationary process must be avoided.
• The loss of income in the economy on account of rising energy costs, compounded by the invasion of Ukraine, should
be shared between employees (fall in their purchasing power) and firms (reduction in their profit margins), to prevent
an inflationary spiral.
Incomes • Avoidance of measures that are broad or excessively rigid, given the heterogeneity among sectors, firms and
agreement workers, to prevent the adjustment from being borne by the most vulnerable.
between • Non-usage of formulae that automatically link wages to past inflation or indexation clauses, which, if applied, would
employees and increase second-round effects (inflation-wage growth spiral).
employers • Multi-year commitments to wage increases (e.g. to underlying inflation), complemented, where appropriate, by job
protection commitments that provide certainty to agents in their consumption and investment decisions.
• Profit-margin moderation commitments, to ensure the competitiveness of Spanish firms and that economic growth is
affected as little as possible.
19IT APPEARS THAT COSTS ARE ALREADY BEING SHARED BETWEEN EMPLOYEES AND
EMPLOYERS
As regards employees, in February the wage increase agreed for 2022 rose to 2.3% (from 1.5% for 2021), a percentage
clearly below the inflation rates observed in recent months and those expected for 2022.
Firms have not been fully passing the increase in their costs through to the prices of their products:
• According to the Banco de España Business Activity Survey (EBAE), in 2021 Q4 three-quarters of Spanish firms experienced a rise in their
costs, while only 30% increased the prices of their products.
• According to the Central Balance Sheet Data Office Quarterly Survey, higher energy costs have dampened the recovery in earnings in the
most energy-intensive sectors.
BUSINESS MARK-UP IN 2021 Q4
WAGE INCREASE AGREED
Difference with respect to 2020 Q4
%
3,0 pp
2
2,5 1
0
2,0 -1
-2
1,5 -3
-4
1,0 -5
Total Of which: Of which:
industry mineral other
0,5 and manufacturing
metallic
0,0 products
2015 2016 2017 2018 2019 2020 2021 2022 (to Total Industry Trade Inf. and Other
Feb.) firms and communi-
hospitality cations
TOTAL REVISED NEW
Sources: Banco de España and Ministerio de Trabajo y Economía Social. In the right-hand chart, mark-up is defined as the ratio between GVA and output.
20BUT INDEXATION CLAUSES ARE BECOMING MORE PREVALENT
In the agreements recorded to February 2022, there has been an increase in the percentage of employees with
indexation clauses (28.7%, compared with 16.9% in 2021).
The wage increase agreed for 2023 is expected to be in line with that agreed for 2022. However, for 10% of the
employees concerned, this increase is indexed to inflation developments, and one-half of the employees affected
have indexation clauses included in their agreements.
PREVALANCE OF INDEXATION CLAUSES EMPLOYEES SUBJECT TO COLLECTIVE BARGAINING
RELATING TO INFLATION AGREEMENTS FOR 2023
% of total y-o-y change, % 1800000
80 7
1600000 Wage increase agreed =
70 6 1.9%
1400000
5
60
1200000
4
50
3 1000000
40
2 800000
30
1 600000
20
0 400000
10 -1
200000
0 -2
0
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
Effective in 2023 Increase Indexed to CPI Indexed to Other Indexation
established Budget indexations clauses
INDEXATION CLAUSES CPI (Dec t-1) (right-hand scale)
Source: Ministerio de Trabajo y Economía Social. Latest observation: February 2022.
21THANK YOU FOR YOUR ATTENTION
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