By Belén Carreño

MADRID (Reuters) – Surging prices across Europe could hinder the economic recovery in Spain, where small businesses crucial to local employment are more exposed than elsewhere on the continent to steep rises in power bills.

Spain’s energy bills are more than twice as high as in other European countries due to rising gas prices. Low storage stocks and factors like low inventories have pushed companies into financial crisis, forcing governments to devise measures to mitigate the damage.

Food producers have been affected as carbon dioxide suppliers, used in vacuum packaging of foods to preserve shelf life and put fizz on beer and soft drink, is unable to keep up with record gas prices.

Analysts say Spain is especially vulnerable to an increase in household fuel costs due to its large number of flexible tariff customers, who are highly sensitive to changes in prices.

Spanish small business, accounting for an disproportionately large 61.3% economic activity and 71.9 percent of total employment are most at risk.

These small businesses are not as able to withstand the rising prices and they report that they struggle to invest in expansion and re-hiring after the COVID-19 epidemic, which resulted in the GDP shrinking by an unprecedented 10.8% between 2020-2022.

Mayra maldonado, 41 years old, runs a dry cleaning company in Madrid, with Gladys Mariscal. “We cannot hardly cover expenses.”

In August pre-COVID, our turnover was 6,000 Euros and we paid 600 EUR for power. We have earned 3,000 euro in August and paid 1,050 Euros for electricity.

Maldonado endured a heatwave in August where temperatures reached 40°C. There was no air conditioning and there were very few fans to cool the room. This effort was made in order to lower electricity bills for businesses that use electrical appliances in peak hours.

Maldonado, who had worked as an employee in the past 15 years, took the business over in March 2020 just days before the first lockdown.

The turnover of our business is 40% less than the one that this dry cleaner made. This has caused us to be very affected by remote work.

POTENTIAL SAVINGS DRAIN

Recent indicators pointed to a solid revival of the economy, as high vaccination rates bolstered activity and tourists flocked to sunny destinations over the summer. According to the government, the economy will return to its pre-pandemic state by 2021.

The recovery has depended heavily on consumers spending, who now face 35% increases in their electricity bills each year.

That could drain 20 billion euros in savings for households and small businesses, according to estimates by Raymond Torres, chief economist of the Funcas thinktank

“The impact of the power hike comes after a terrible crisis. Luis Aribayos is the secretary general for Spain’s association small and medium-sized enterprises.

In line with European Central Bank’s view, the Bank of Spain stated that the temporary rise in interest rates will not have any impact on the economy. Analysts believe that this rise, even though it is temporary, will impact profitability margins and competition.

“Small businesses were forced to take out their savings and get into debt. Aribayo explained that the small businesses can no longer take it.

To mitigate rising prices and reduce taxes, Aribayo said that the government had approved an emergency plan last week. It also included a gas price cap, which will prevent the country from absorbing all of the increases in the wholesale market.

Italy and Greece find themselves in similar situations and seek Spanish-style solutions that will prevent price increases from affecting consumers. Britain, too, is considering energy company support and has expressed concern that its suppliers may be outsourced.

Spanish companies, who may see the effect of government cuts in future bills, have chosen to absorb the increases rather than pass them along to customers. This will slow down the inflationary spiral.

They can’t raise prices, so prices can’t even be touched. Customers will leave if you raise prices by 50c. We see the rise in electricity as much greater. Maldonado said that we haven’t seen prices change in the past five years.

Torres predicts that the inflation rate will rise to 4.5% this year. This is the highest level in over a decade. However, it will not be a temporary phenomenon and will impact the recovery.

“The increase in prices is stronger in Spain than Italy and France, and it even surpasses the euro zone inflation, and that isn’t a positive factor for our competitiveness,” stated Alicia Coronil chief economist at Singular Bank. She also warned about a degrading consumer sentiment.