Behind in GDP and ahead in inflation

As Nobel laureate Paul Krugman puts it, the Covid-19 recession has caused “surprisingly little” damage, all things considered (GDP, jobs, inflation, etc.). He basically refers to the US, but his lesson can be largely extrapolated to Europe as a whole; especially when he talks about “large-scale” public spending. There may be more doubts if the extrapolation is made to Spain, since its recovery in GDP prior to the pandemic is far from similar to the levels reached in the US or Germany, in part due to the strong weight that tourism has here.

Krugman is encouraging even when addressing inflation – “getting the US back to full employment as quickly as possible was urgent, and worth it even if the price was putting us through, say, two years of high inflation” – which he puts at a longer period than is usually handled in Europe, with an eye on this spring as a reference.

The final figure for the CPI in Spain for December was 6.5%, its highest level in decades, but without reaching 7% in the US. It is a serious problem, but widespread, which does not fix anything –“ evil of many, consolation of fools, says the proverb–, although at least it contains populist temptations to turn this case into a throwing weapon.

There will be high inflation as long as the prices of energy and non-processed products are not contained, since the rest of the things – read core inflation – have gone up, but not that much. From the European Central Bank (ECB), which is the one that manages monetary policy in the eurozone, with preferential attention to inflation, for the time being it is confident in the moderation of energy prices in spring, a good expectation without a doubt. Now, if inflation persists, its president, Christine Lagarde, will not be able to distance herself from what other major central banks are doing, starting with the US Federal Reserve. adjust interest rates upwards.

In Spain, it happens that with the problem of the CPI the same thing happens as with the recovery of the economy itself: it is worse. It is behind its main European partners in GDP and remains ahead in inflation, when in the eurozone there are already signs that the price index may have peaked. “Looking ahead to 2022, we expect inflation to continue at high rates above the ECB’s target of 2%, but below 2021,” says Nieves Benito, head of Fundamental Research at Santander AM.

In this context, calls for a “fair distribution” of the losses caused by inflation are making their way, as suggested by the Governor of the Bank of Spain, Pablo Hernández de Cos. But the great underlying key is still in the economic model – it will take years to change it – and in the recovery of growth.

Unlike what happens in the large industrialized countries, the Spanish GDP continues to be below –the tourism sector closed 2021 with a turnover 42% lower than before the outbreak of the pandemic– and both structural reforms are required –there are, for example, pensions and taxes – such as efficient management of European recovery funds. The level of political debate is not always up to par and gets entangled in issues that, while flashy, are minor.

@J_L_Gomez