Spain and EMU | Effects of bottlenecks on inflation and activity

In this presentation, we show the modeling strategy proposed by BBVA Research to identify bottleneck shocks, differentiate them from other supply-side shocks, and calculate their impacts on the European and Spanish economies.

Key points

• Key points:
• The COVID-19 crisis has been a major disruption in value chains. Not only during the initial phases of the crisis, when most of the planet was confined and a large part of non-essential production and international trade came to a halt, but also in the most recent months, despite vaccines roll out is supporting economic recovery.
• Initially, bottlenecks were expected to be short lived, with very limited effects on activity and final prices. However, as the months go by, it is becoming apparent that are likely to extend well into 2022.
• Given the high uncertainty, we present several simulations of the duration and intensity of the shocks to assess the cumulative effects on activity and prices, both for Spain and the EMU. The figures presented should be read as deviations from the baseline scenario in the absence of these shocks and not as a forecasting exercise. It should be noted that there are other demand and supply shocks (i.e., energy prices hikes) that are impacting on the economy and are outside the scope of this report.
• Our estimates suggest that current shocks are unprecedented for both Spain and especially for the EMU. On a yearly basis, the Spanish economy could grow 0.3pp more in 2021 in the absence of the bottlenecks registered until 3Q21, while the impact on the European economy is close to 0.45pp
• If shocks persist in 4Q21, the impact on the 2022 growth for the Spanish economy could reach 1.2pp, while the impact for Europe would be 1.5pp. If bottlenecks last another year, they could subtract up to 1.5pp from 2022 growth in Spain and up to 2.0pp in Europe.

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