Just a few days after the Bank of Spain and BBVA's research department in Spain presented their macroeconomic projections - which lowered their growth forecast for the country to 2.4% and 2.5%, respectively - the outbreak of conflict in the Middle East has brought a new focus of uncertainty to the table that could invalidate the estimates: the escalation of oil prices.
Israel's bombings on Iran have caused the price of oil to soar in international markets, although the increase is currently relatively contained. The Brent crude oil, the European reference, rose 7% last Friday, the most significant one-day increase since Russia invaded Ukraine in February 2022, amid widespread fears that the supply from the region may be interrupted. After the weekend, oil prices reached highs not seen since late January in the early hours of Monday, above $78, although it later closed the session at $73.23, a 1.35% decrease.
Although the markets seem relatively immune to conflicts in the region and the reaction appears contained (futures for four or five months place the price between $70 and $75 per barrel), the climate of uncertainty affects the price. "If Iran perceives a significant threat, it could consider blocking the Strait of Hormuz, a critical chokepoint through which approximately 25% of the world's oil trade flows. Such action would also affect Iranian exports and could strain relations with other oil-producing countries and major consumers like China," says Kerstin Hottner, director of commodities at Vontobel. Furthermore, she warns, "in the event of attacks on Iranian oil export facilities, there is a possibility of retaliatory strikes against other oil production or export infrastructure, as seen in 2019 when attacks on Saudi Aramco temporarily disrupted half of Saudi Arabia's oil production."
Any such move would automatically result in an even greater price escalation, directly impacting domestic economies like Spain, which heavily relies on imported oil, making any price increase automatically require more effort and subtract tenths from the GDP.
Days before the Israel movement, the forecasts were very different: "We were coming from a forecast around $75 per barrel that we had lowered to $65 per barrel, which would have given us a few more tenths of growth. Now we have retraced the path we were on," explains Camilo Ulloa, BBVA Research's lead economist for Spain and Portugal and inflation specialist, to EL MUNDO. According to his calculations, the oil price prior to the Israel movement, combined with relatively stable gas prices, could have contributed half a point of growth to Spain: 4 tenths this year and one next year. Since oil carries more weight, their models estimate that "for every ten additional points in oil price in dollars, that subtracts three tenths of growth." "That's what the markets would be discounting," he points out.
Regarding inflation, he warns that the impact "directly affects" food and energy products and, secondly, would affect services. "For every 10-point increase in oil prices, residual inflation (energy and food) increases by 1.1 points," while for general inflation, the impact is 0.2 points.
"We wouldn't necessarily go to a scenario with high inflationary pressures, regardless of what may happen because there is too much uncertainty. We have to wait and see how other suppliers and substitute products react: see what happens with the gas market, renewables, and the rest of the energy mix in Spain, but the news is not positive because it is a negative supply shock," he admits.
Raymond Torres, director of Economic Outlook at Funcas, tells this medium that the rise in oil prices will result in less growth (one tenth less this year) and more inflation. This organization projects three possible scenarios. The central one assumes that the oil price increase will be temporary and will return to around $65 in a few weeks, gradually increasing to $70 in 2026. This forecast would lead inflation in Spain to average 2.4% this year and 1.9% next year.
However, this framework could be improved or worsened. In the best-case scenario, if it is assumed that oil stabilizes around $65 during this year and the next, inflation could decrease from 2.4% on average this year to 1.4% next year; but in the worst-case scenario, if the conflict becomes "persistent" and the oil price rises 20% above that considered in the central scenario before dropping to $75 in 2026, the result would be inflation of 2.8% on average this year and 2.4% next year.
Historically, the Government has estimated in its latest Stability Programs that for every ten euros increase in the price of a barrel of oil, real GDP loses 0.5 points that year, 1 point the following year, 1.2 the next, and 1.4 the year after, with pronounced declines in private consumption from the second year onwards and also in public revenues from that year and the following three (0.2; 1.1, 1.3, and 1.4 points, respectively). The public balance as a percentage of GDP is also affected, as well as employment, which is also affected by the rising cost of this raw material.