Report on the financial situation of households and firms (1st half of 2023, Spain)

The Bank of Spain has published information regarding the state of the accounts of individuals and companies in our country during the first six months of the year.

Table of Contents

In this article we summarize the main keys provided by the institution and we also show some relevant conclusions to reformulate the economic strategy with regard to September.

Financing costs for households and businesses continue to rise

Due to changes in the European Central Bank’s monetary policy at the end of 2021, interest rates in the euro zone have reached 400 basis points (bp). This increase has been transmitted to the reference interest rates of the financial markets, which translates into greater difficulties in accessing loans and credit. What is the immediate consequence?

Undoubtedly, the fact that, the higher the risk perceived by the entities, the lower the supply of credit. Banks shield themselves from defaults and, of course, the most affected are those with lower incomes. In the case of companies, the restrictions affect the smallest, the newly created and the most vulnerable from a financial point of view.

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The downward trend in the household saving rate has come to an end 

After the period of inflation, an improvement in the economic situation of households is perceived. The purchasing power of Spanish families has been recovering during the first months of 2023, except in the case of debtors, who suffered the interest rate rise and now have lower disposable income. Since the end of 2022 we also see an accumulation of liquid assets by households.

These assets include temporary financial investments that can be quickly converted to cash without losing value. Specifically, stock, bonds or shares. Let’s not forget savings, which have recovered pre-pandemic levels and are enjoying good health thanks to the contraction in consumption and the increase in purchasing power. This needs to be explained, since the lowest incomes had difficulties in meeting expenses.

Micro-savings: how to reach your financial goals effortlessly

The financial situation of companies has continued to improve 

According to the Central Balance Sheet Data Office Quarterly Survey, ordinary profit have increased, driven by the advance in economic activity and, in some cases, by the recovery of sales margins. Profitability stood above pre-pandemic levels in most sectors, thanks also to the drop in the level of indebtedness.

It has to be said that these results are based on a reduced sample of companies, generally large ones. The qualitative information from surveys reveals a worse evolution of profits in smaller companies. In any case, liquidity buffers remain above 2019 levels.

SOURCE: Bank of Spain. Ratio defined as Cash and other equivalent liquid assets/Total assets.

Household wealth has increased and the debt ratio has fallen

As the Bank of Spain report indicates, the slowdown in housing prices meant that the real estate component ceased to underpin the increase in nominal wealth. The institution affirms that it recovered at the end of 2022, die to the moderation of inflation. In fact, the household debt ratio has fallen to levels not seen since 2003.

Some aspects that have influenced this fall have been the creation of employment and the rise in wages. Of course, families with debts at a variable interest rate and with lower incomes experience less ability to repay that debt and to meet other expenses. In the same way, households with lower income are more vulnerable to inflation.

SOURCES: National Statistics Institute and Bank of Spain. Seasonally adjusted data.

This is due to the composition of their shopping cart and their fewer options to save. Thus, the consumption of households in the bottom quintile of the income distribution practically absorbs disposable income and has a greater bias towards basic goods and services. Nonetheless, gross household income has been 6.8% higher than in 2020.

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Global financial situation of households according to their income level

The effects of the international situation on the household’s economy and consumption are uneven depending on the type of family we are focused on. In general, their circumstances depend on expenses, ability to save, level of indebtedness and type of debt, as well as whether or not they have financial assets.

Households with the lowest income allocate 55% of their budgets to essential goods, such as food and basic supplies —water, electricity, telephone service, etc.—, compared to 30% for the median quintile. If rentals for the main residence are also included, this expense gets to 79% of income for the lowest quintile.

To ease this situation, the Bank of Spain has introduced changes in the code of good practice and there is a trend in the banking sector to position themselves as allies. The population needs to receive advice on economic matters and help in order to have better financial health. Avoiding risky behaviors or learning to save automatically is possible!

For further information, please read the “Report on the financial situation of households and firms. First half of 2023”.

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