15. 03. 2022 the economic setting following the invasion of ukraine and the economic policy response working breakfast with the business sector organised by hill & knowlton pablo hernandez de cos governor good morning. i wish to begin by thanking the organisers for this invitation, allowing me to share some thoughts on the current economic situation. an economic setting which, two years on from the onset of the pandemic, is now feeling the brunt of yet another extraordinary shock with potentially extremely negative effects for the world economy. naturally i am referring to the invasion of ukraine by the russian army 20 days ago. in addition to the extraordinary human drama this poses for the people of ukraine, the consequences of the invasion, albeit difficult to predict, will foreseeably be global and extremely severe, for both the geopolitical and the economic situation. i will now analyse some of these possible consequences and the most appropriate economic policy response. the economic situation prior to the invasion my starting point for this analysis has to be that, after the strong decline observed in 2020 as a consequence of the pandemic, before the russian army invaded ukraine the global economy was on a gradual recovery path, albeit one that was uneven by geographical area, economic sector and population group. thus, while some economies had managed to reach and even exceed their pre - crisis activity levels by the end of 2021, others continued to suffer from an economic activity gap. in any event, the recovery was still influenced by the course of the pandemic, partly as a result of the emergence of new variants of the virus. another novel feature of economic performance in 2021 was the strong global surge in inflation. this was especially severe in both energy and non - energy commodities, after many years in which their price increases had remained at persistently low levels. the intensity and persistence of the inflation surge – fuelled by both demand and supply factors – systematically surprised on the upside. notable among the demand factors are the relatively strong recovery in activity following the collapse in 2020 and the changing consumption patterns as a consequence of the pandemic and the measures adopted to contain it. among the supply factors, global production and supply chain disruptions, as a consequence of the disruptions in the production of certain intermediate goods and in some modes of international goods transport, stand out. both these aspects – a recovery influenced by the course of the pandemic and continuous upside inflation surprises – continued to determine the pace of the global economy at the start of 2022. accordingly

to have declined recently as a consequence of the current inflationary episode. this can be inferred, for example, from the responses of firms in the latest edition of the banco de espana ’ s business activity survey ( ebae, by its spanish initials ), corresponding to the fourth quarter of 2021. according to the results of the survey, three - quarters of spanish indeed, several simulation exercises carried out with the banco de espana ’ s macroeconomic models, show that, should second - round effects on inflation materialise as a result of significant wage rises or the maintenance of profit margins, the losses for the whole economy arising from a negative shock to the terms of trade would be much greater. firms experienced a rise in their costs in this period as a result of higher input prices, while only 30 % increased the prices of their products. second, it is vital that any incomes agreement between workers and employers should facilitate the coordination of collective bargaining across its various areas, while avoiding measures to be implemented too broadly. in fact, taking into account the extraordinarily asymmetric impact of the current shocks on different groups of workers, businesses and sectors ( which are themselves highly heterogeneous ), it would be advisable to avoid solutions that will be excessively rigid for certain segments of activity and / or businesses. 5 third, it would also be desirable to avoid formulae that automatically link wages to past inflation or indexation clauses. 6 if these clauses increase or become more prevalent the risk of a wage - price spiral will rise significantly. in this respect, according to the latest information available, almost 30 % of workers with settlements recorded in january and february this year have some type of wage guarantee clause relating the eventual increases agreed in 2022 to inflation developments. this is higher than the 17 % figure recorded at the end of 2021. 7 fourth, any incomes agreement should contain multi - year commitments relating both to wage increases and job protection. in a context as uncertain as the current one, such commitments would give households and firms considerable certainty for their spending and investment decisions, which could make economic activity as a whole more dynamic. within this multi - year horizon, the nominal benchmarks for wage bargaining should exclude components associated with energy products, the price dynamics of which are highly volatile and, in the current situation, unlikely to be lasting. in contrast, the nominal benchmarks on which wage bargaining is to be based should stem from the projected trend in underlying inflation. these recommendations apply both