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
This third and final episode of the series dedicated to labour productivity in Spain, discusses key developments capable of restoring productivity in Spain, in particular through the National Recovery Plan (2021-2026) and the España 2050 strategy.
Public deficits in Greece, Portugal and, to a lesser extent, Spain, dropped significantly in 2022. According to Eurostat’s preliminary results – published on 21 April – the primary deficit nearly halved in Spain (-2.4% of GDP), it was erased in Greece, while Portugal once again posted a surplus (1.6% of GDP). In Greece and Portugal, the public deficit fell below the 3% GDP limit set by the Growth and Stability Pact, with which they had already realigned between 2016 and 2019. Although down sharply, the deficit in Spain remains significant, at 4.8% of GDP.Better-than-expected growth in activity and employment and high inflation generated strong tax revenues, which more than offset the rise in spending to cushion the inflationary shock
Our forecasts are for Spanish GDP to grow by 0.3% in the first and second quarters of 2023. In fact, PMI surveys have posted a clear rebound since the beginning of the year. In particular, the composite index reached its best level in almost a year and a half (58.2), led by services (59.4).
The Spanish economy held up better than expected in 2022 (+5.5%), but a slowdown in activity is expected this year. Industrial production is declining, hindered by the energy sector and intermediate goods and services. Investment and private consumption fell significantly in Q4 2022 and will remain under pressure in 2023 from rising interest rates and high inflation. Excluding energy, the rise in consumer prices accelerated further to 8.2% in February. The reduction in the public deficit – greater than expected in 2022 – is making it easier to continue budgetary support in 2023
Trends in the PMI indices are making a short-term economic downturn less likely. Our initial forecasts of a contraction in economic activity for Q1 2023 were also revised upwards, with moderate growth now expected (+0.2% q/q).
The improved business climate points to a risk of an upwards revision in our current estimate of contraction in Spain’s GDP in Q1 2023. The composite PMI topped the 50-point threshold in January at 51.6, five months after slipping below this level. This rebound can be attributed to services (52.7), while further contraction was seen in manufacturing activity (48.4). While manufacturing production increased by 0.8% m/m in December and 2.8% in 2022, it has only just closed the gap relative to 2019.
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.
