ECB to cut interest rates three times this year, says S&P

The US rating agency S&P joins the host of international forecasts on what will happen to interest rates and inflation in the eurozone this year.

According to its calculations, the price increase in the common currency region will not return to 2% before 2025, while the ECB will cut rates from the first half of the year, with a total cut of 75 basis points over the year. Specifically, it estimates three rate cuts of 25 basis points, as do fund managers such as AXA IM.

The rating agency has kept a stable economic outlook in Spain, predicting that Spanish GDP will grow by 1.8% this year, accelerating slightly to 2% in 2025 and 2.1% in 2026.

"Spain has performed better than expected [in European GDP comparisons]," said Leandro de Torres Zabala, managing director and head of analytics and corporate ratings at S&P for Europe, the Middle East and Africa. This is due to the prominence of the labour-intensive services sector and the good performance of wages. This has meant that confidence indicators in Spain are "relatively solid", except in industry.

As for price evolution, S&P forecasts that the average annual Consumer Price Index (CPI) in Spain will close this year at 3.1%, moderating to 1.9% in 2025 and falling to 1.8% in 2026. Regarding the labour market, the firm estimates that the unemployment rate will be 12.1% in 2024, falling slightly to 12% in 2025 and 11.8% in 2026.

S&P has stated that the labour market has been "very robust" and that the labour reform has been useful in reducing temporary employment. Likewise, the agency does not predict a future rise in unemployment, but Spain will continue to be the European economy with the worst data.

Public deficit of 3.2% this year

On the other hand, S&P's public deficit forecasts estimate a gap in the public accounts of 3.2% for this year, 3.3% for the following year, and 3% in 2026. Likewise, public debt levels for the current year will reach 106.1% of GDP and decrease until 2026, although it will still be above the psychological barrier of 100%.

Inflation has already affected tax collection, mainly indirect taxes, and the trend has also been "relatively good" on the direct tax side, such as personal income tax. Maintenance or not of benefits to alleviate the inflationary crisis will weigh on deficit levels.

As for the autonomous regions under the common system, it is worth highlighting the growth in their revenues due to the improvement in the settlement of the previous financing system and the payments on account, which will provide an opportunity to consolidate their budgetary results. The scope and impact that writing off debt to the regions could have on the national accounts is still pending.

S&P concluded that a "powerful" debt reduction could lead to Spain's rating improving from its current levels of A/Stable/A-1. In contrast, an increase in debt could result in rating downgrades.

In addition, there are delays in implementing European funds as the lack of staff would interfere with the high administrative burden of processing them and the nature of the projects involved.

European context

The eurozone will keep growth sluggish and advance 0.8%, with GDP growth of 0.5% in Germany, 0.9% in France, and 0.6% in Italy, according to S&P.

However, despite the "weak" outlook, this could improve from the second part of 2024, depending on the labour market, inflation expectations and financial conditions. The rating agency therefore sees a "soft landing" situation as the central scenario.

S&P forecasts early signs that services might be losing dynamism at the European level, while industry might be "hitting bottom", particularly in Germany, after regularising its inventories and adjusting its production to the new energy costs.

In the medium term, the situation should improve, as monetary policy should be neutral and fiscal policy somewhat less restrictive. S&P believes that European funds should accelerate, and household purchasing power will be boosted by disinflation.

As for cost of living, inflation is not expected to return to the 2% target set by the ECB before 2025. S&P has advanced that the first interest rate cut would be from the middle of this year in up to three cuts that could add up to a final cut of 75 basis points.

The main downside risks will be that geopolitical tensions escalate, that financing conditions tighten, that there is a recession in Europe, that the real estate sector suffers or that the Chinese economy slows down. Possible disruptions related to climate change and cybersecurity issues will play a role.