The end of the year is shaping up to be as dynamic as it has been all year in Spain. After posting even greater growth than expected in Q3 (0.8% q/q compared to an anticipated level of 0.6%), the first available data for Q4 unsurprisingly indicate that the Iberian country will remain at the head of the pack for the four major euro zone economies. According to our forecasts, real GDP should grow by a further 0.7% q/q in the final quarter of the year, bringing average annual growth to 3.0%.
Business sentiment continued to improve in September. The PMI recorded its tenth consecutive month of growth (56.3; +2.7 points over one month). It was driven by a dynamic services sector (57.0; +2.4 points), buoyed by continued strong tourism activity (+11.2% y/y YTD in tourist arrivals), and by a recovery in manufacturing activity (53.0; +2.5 points). Although industrial production continued to decline in August (-0.2% 3m/3m), the outlook appears more favourable, judging by the rise in business leaders' expectations for their production over the coming months (11.4; +6.2 points, according to the European Commission's economic sentiment survey).
For the fourth year in a row, Spain will be the primary growth driver in the Eurozone. This country’s outperformance is expected to continue over the remainder of 2024, albeit with very slightly less momentum than in H1 (expected growth of +0.6% and +0.7% q/q in Q3 and Q4 after +0.9% and 0.8% in Q1 and Q2). Foreign trade, mainly driven by the still significant growth in exports of tourism services, should continue to support activity. For its part, the marked fall in inflation (+2.4% y/y in August; -1.2 pp over two months), combined with the strength of the labour market, should allow private consumption to gradually recover.
2024 is shaping up to be a record year for tourism. Between January and May, the number of tourist arrivals in Spain reached 33.2 million, far outstripping the level recorded during the same period in 2023 (by 13.6%). Tourist spending (+21%), which significantly boosted services exports in Q1 (+10.8% q/q), is likely to have continued to do so in Q2. Nevertheless, despite its undeniable effects on Spanish growth, mass tourism is becoming a source of tension in the country due to its impact on access to housing and resources. This has led Barcelona City Council to introduce a plan to stop renewing tourist apartment licences, which will lead to their phasing out by 2029.
In Q1 2024, Spanish real GDP growth was, as expected, one of the highest in the euro zone (+0.7% q/q). It was mainly driven by foreign trade (contributing +0.5 pp), which was directly supported by the record tourism figures recorded at the start of the year. In the second quarter, we expect activity to remain strong (+0.7% q/q) due to a gradual recovery in private consumption, continued growth in exports, and support for investment from future disbursements of NGEU funds.
Unsurprisingly, the Spanish economy remains positive at the start of the second quarter. After outperforming eurozone countries with growth of 0.7% q/q in Q1, activity should stay strong in Q2 (0.5% q/q according to our forecasts).
In 2023, Spanish real GDP (up an annual average of 2.5%) grew much more than Eurozone real GDP (0.5% y/y). Household consumption, the main driver of growth, was buoyed by the strong labour market and slowing inflation. We are forecasting growth of 0.4% q/q in Q1 2024, before it accelerates in the subsequent quarters. Therefore, for the fourth year, Spanish growth is expected to be one of the Eurozone’s driving forces (2% y/y versus 0.7% y/y).
As expected, Spanish inflation slowed in February. In year-on-year terms, the Harmonised Index of Consumer Prices (HICP) rose by only 2.9% (-0.6 percentage points compared to January) due to an increase in energy price deflation, itself brought about by favourable weather conditions.1 Like other countries in the eurozone, inflation in services persists in Spain, the country remaining the main component contributing to overall inflation (contribution of 1.9 pp).
January's business confidence surveys showed signs of improvement. The composite PMI index points to an expansion in activity (51.5), driven by the ongoing solid performance of the services sector (52.1). The manufacturing sector is also seemingly enjoying a bit more tailwind at the start of this year. After ten months of contraction, the associated PMI is showing signs of recovery (49.2; +3.1 points), with Spanish companies reporting a lesser deterioration of all sub-indices, with the exception of the sub-index relating to suppliers' delivery times (44.5; -3.5 points).
In Q3 2023, Spanish growth eased slightly to 0.3% q/q. It was primarily driven by household consumption, which was itself supported by the resilience of the labour market and the increase in real wages. After an increase in H2 (from 1.6% y/y in June to 3.3% in December according to the harmonised price index), inflation is expected to fall again in 2024 and drop below the target of 2% in Q3. We expect growth to remain moderate at the end of 2023 and in early 2024 (0.2% q/q), before returning to positive territory. Spain will remain one of the drivers of the euro area for another year, with expected growth of 1.5% on an annual average versus 0.6% for the euro area.
Contrary to the trend observed in the other three major eurozone countries, Spain recorded a more moderate fall in inflation in November. According to the INE, the growth in the Harmonised Index of Consumer Prices (HICP) slowed by 0.2 pp to 3.3% y/y this month (while the decline reached 0.7 points in France and Germany, and 1.1 points in Italy). Based on recent trends in the producer price index, which recorded its eighth consecutive month of deflation in October (-7.8% y/y), this consumer price slowdown is set to continue, and even accelerate, over the coming months.
The Harmonised Index of Consumer Prices (HICP) rose again to +3.5% y/y in October (+0.21 pp). Food inflation remains high, although it eased from September (+9.5% y/y in October, -1 pp). However, the surge in olive oil prices persisted (+73.5% y/y, +6.5 pp), contributing 0.37 points to overall inflation. As for energy, the deflation is subsiding but remains significant (-10.1% y/y, -3.7 pp). Core inflation meanwhile, eased to +3.8% over a year.
In September, the European Commission’s economic sentiment indicator fell to its lowest level of the year in Spain. This reflects a slowdown in activity which, according to our forecasts, will result in a slowdown in growth to 0.3% q/q in Q3 and 0.2% q/q in Q4. Inflation is also regaining ground and is again weighing on household confidence, as is the modest deterioration in the unemployment expectations index. It should be noted that the outlook for price developments differs quite significantly depending on the sector, according to the European Commission’s survey: it indicates a new pullback in price pressures in construction (-1.9 pts) and industry (-1.6 pts, the lowest since January 2021), while an upturn is observed in services (+3
Despite the unprecedented rise in interest rates, in Spain, the non-performing loan ratio for households and corporations remains at an all-time low.
Until this summer, the Spanish economy had proved resilient to the interest rate shock. Private consumption and investment were up respectively, 2.7% y/y and 2.0% in Q2 2023. The positive trend in the labour market and the savings accumulated during the pandemic supported household spending, along with the decline in inflation, which allowed purchasing power to stabilise. However, these supports are falling off. Economic activity will slow in H2 2023 but will not come to a standstill. However, with growth now forecast at 2.2% in 2023 as a whole, Spain will remain one of the drivers of the euro zone this year.
The slowdown in activity in the second half of 2023 should be contained: real GDP growth would only decline, from +0.4% q/q in Q2 2023 to +0.3% q/q in Q3, and +0.2% q/q in Q4. The deterioration in the PMI surveys is continuing in both the manufacturing sector and the services sector.
The rise in interest rates and the slowdown in activity in the eurozone are still not leading to a turnaround on the job creation front in Spain, quite the contrary.
Economic activity in Spain remains dynamic. The fall in inflation, combined with employment gains this year, constitutes significant support for activity, which will counteract the increase in mortgage payments faced by some households. We now anticipate stable and moderate growth in activity at 0.4% q/q for the second and third quarters of this year. Retail sales in volume terms recovered in April (+4.1% m/m) before edging back down the following month (-0.4% m/m). Tourism activity in the spring suggests a summer season that will be, if not exceptional, at least as successful as 2019, which has been a record year to date: in May 2023, several indicators (number of foreign tourists entering the country, hotel stays) were above the levels recorded in the same period in 2019.
The labour market report published by the Spanish Employment Agency (SEPE) on July 4th surprised favourably again. The number of unemployed workers dropped by 1.8% m/m (-50,268) to its lowest level since September 2008.
The drop in inflation in Spain has provided no respite for the coalition in power. The Socialist Party’s losses in the regional and local elections on 28 May to the People’s Party, led Prime Minister Pedro Sanchez to announce a snap general election on 23 July, five months before the originally scheduled date. Despite a still dynamic labour market, the drop in purchasing power and the housing crisis are penalising the party in power, which has fallen even further behind in the polls this spring. The property market is showing signs of a limited correction for the time being, but the continuation of monetary tightening and the resulting hike in lending rates are likely to accentuate this downturn.
Despite the support of tourism, which has been at levels close to those of 2019 since the beginning of the year, the effects of the rise in interest rates and the drop in household purchasing power on the Spanish economy should worsen over the course of the year.
The transmission of higher interbank rates to bank deposit rates is still limited in Spain.
Spanish growth strengthened slightly in Q1 2023, to +0.5% q/q, according to preliminary figures from INE. However, this acceleration, supported by investment and external demand, did not allow real GDP to cross the pre-Covid threshold. It still showed a small deficit of 0.2% compared to Q4 2019.
In this series of three podcasts "Focus on Labour Productivity in Spain" Hélène Baudchon, Deputy Chief Economist and Head of the OECD team, BNP Paribas Economics Department and Guillaume Derrien, Senior Economist in the OECD team, discuss productivity as an endemic weakness of the Spanish model.This first episode reviews the main trends in the evolution of productivity in Spain compared to its European neighbours over the last 25 years.
In this second episode of the series on labour productivity in Spain, Hélène Baudchon and Guillaume Derrien discuss the main factors that explain Spain's low productivity
Spain is a constitutional monarchy with a Prime Minister and a monarch. It is the fourth largest economy in the Eurozone.
On joining the euro, the country experienced a very strong, albeit largely unbalanced, period of economic expansion. Fuelled by the booming construction sector and surging house prices, funded by external debt. The 2008 financial crisis precipitated the burst of the housing bubble which in turn led to an economic and banking crisis.
Spain emerged from the 2008 financial crisis after a long and painful process to reform the labour market and rebalance the economy towards export-oriented sectors. Its banking sector has been restructured and recapitalised. Gains in cost-competitiveness have allowed Spain to increase its market share both inside and outside the Eurozone. The country experienced solid growth in years preceding the Covid-19 pandemic, averaging 2.6% (2015-2019).
Important structural weaknesses persist, and in particular the low of level of investment and productivity, which are among the lowest in Europe. This hinders the growth potential of the economy and limit the number of job creation in the long run. The slump in activity and the countercyclical policies put in place to deal with the coronavirus shock has caused a sharp increase in the public deficit.
