MNI BRIEF: Energy Cost Rise Could Hit Potential Output-De Cos

The recent rise in energy prices could reduce incentives for firms to invest, possibly reducing EU potential output by 0.4%-0.5% and trimming just above 1% from GDP in real terms, Bank of Spain Governor Pablo Hernandez de Cos said Tuesday.

His conclusions assume a permanent increase in energy prices of 30% - since before the start of the crisis - and note that “in the very long-run […] the impact on investment could even be positive if it triggers innovation”. De Cos said the pandemic has seen a lower participation in the labour market, leading to “more structural unemployment” across Europe, noting that the pandemic and the energy crisis have brought “a negative impact on the output gap”.

The negative impact in potential output is expected to be permanent,” he said, adding that the impact of the reduction of potential output is expected to be smaller than the one on GDP.