Andorra: economic storm and differential solution
While the Andorran Government is promoting measures to appease the loss of purchasing power of the country’s citizens, forcing a 3.3% increase in salaries below the average salary of the country or the pensions which are below the minimum salary by 3 67%, or making part of the transport free, or improving study grants, or reducing the IGI of basic necessities or optimizing the efficiency of the tax for empty apartments, among others, and which are supported by an extraordinary credit of approximately 10 million euros, the inflationary process on a world scale is inexorably advancing, aggravated by the war in Ukraine, and is leading us to an unprecedented economic crisis and a recession that will harm us, also Andorra, if the appropriate measures are not taken.
In Andorra, year-on-year inflation in May was 6.6%, compared to 8.7% in Spain and 5.2% in France, while in the first 5 months of the year it was already 4.8%. Clearly, the rise in food prices, but especially fuel prices, has had a lot to do with this. Let us recall that, on average, since May 2021, fuel prices have risen by 55%, to €1.65/l.
Meanwhile, the European Central Bank, faced with an international inflation rate of 8.1% in May, has decided to react by announcing a first-rate hike of 0.25% in July, the first in 11 years, although everyone is aware that the European economy is not yet ready for a rate hike, and who knows, there could be a second hike in September, equal or higher. Meanwhile, the US Federal Reserve has just approved a historic rate hike from 0.75% to 1.75%, and further hikes are expected.
Next, the ECB plans to start controlling inflation, which is expected to be 6.8% in 2022, 3.5% in 2023 and 2.1% in 2024. Obviously, a rise in interest rates will mean that less money will be injected into companies, which will contract, and economic growth will slow down. Thus, the ECB forecasts growth of 2.8% in 2022, 2.1% in 2023 and 1.6% in 2024. It is clear then that the next two years, 2023 and 2024, we will experience an economic crisis that will be felt. We can imagine layoffs, contraction of consumption and foreclosures, among other effects and clearly, all together can influence the countries around us, that if they spend less on tourism, they will spend less in Andorra, with the corresponding damage to our vulnerable economy.
Some may say that this was before and that now Andorra has other mechanisms that allow us not to be so pessimistic, and in fact, those who see it that way is not wrong. Indeed, our country is not as indebted as neighbouring countries and, above all, it is in a phase of consolidation of the process of investment liberalization and economic diversification initiated in 2011. Precisely for this reason, we believe that the Andorran jurisdiction can become strong thanks to the more than obvious attraction it represents for foreign investors who, in addition to finding financial, economic, fiscal and social stability, our country can be a perfect refuge for times of crisis such as the one we are experiencing.
In the international context, specialists predict a 10-year recession if adequate measures are not taken. In fact, according to them, the conditions are in place for a “perfect storm” to occur, especially if the excessive growth of inflation cannot be controlled and stagflation is perpetuated, accompanied by a rise in interest rates which, since there is no end in sight, will cause the economic recession described above. The same specialists understand that in the short term, and regardless of what the United States does, the European economy cannot afford rates above 1.50% and also predict that it will be difficult to go below 4% inflation, despite the ECB’s forecasts to the contrary.
Faced with this panorama, which is not at all encouraging, Andorra is postulated as the differential solution, based on its stability and the prospects of consolidation of foreign investment and economic diversification. This new business ecosystem is therefore preparing to test itself and become the majority option for those who, tired of the turmoil in their respective countries, are looking for peace, harmony and prosperity in an incomparable natural and safe environment.
Augé Legal & Fiscal