SPAIN

The Spanish economy has held up remarkably well despite the challening context of the war in Ukraine. Q2 GDP data came out slightly above expectations, with domestic demand making a key contribution, supported by the recovery of private consumption as well as by the strong increase in investments. However, while external demand played a key role earlier in the year, the data suggest that the adjustment in the tourism contribution was not enough to offset the slowdown in goods exports. We expect Spain to grow by +2.2 % in 2023, outperforming major Eurozone peers, followed by average growth of +1.8% in the 2024-2026 horizon. 

In the near term, we expect a continued positive contribution from net exports, but we see countervailing forces on the demand side that should keep its contribution to economic growth relatively modest. On the one hand, we expect the weakness in private consumption observed so far to continue to ease going forward, thanks to a robust labor market and improvements in real income resulting from the rapid decline in inflation (we expect the headline CPI to reach 3.8% in 2023 and 3.1% in 2024) and expected wage increases (4.6% in 2023 and 4.1% in 2024). Investments will be supported by the NGEU funds, but we see a lot of uncertainty in their short-term impact due to the current political uncertainty following the undefined results of the general elections, in addition to the well-known bureaucratic delays. On the other hand, we note that the continued tightening of financing conditions is dampening domestic demand growth in the near term and fiscal policy will be less supportive in the medium term. In particular, fiscal transfers introduced last year to address the energy crisis will start to come to an end in the coming months and new fiscal rules are going to be introduced in the Eurozone in 2024, meaning that fiscal policy is certainly going to become more restrictive. In the medium term, the resolution of domestic political uncertainties, further disbursements of NGEU funds, a further decline in inflation and the expected interest rate cut by the ECB next year should help boost the country's growth in the second half of 2024.

Spain continues to face challenges due to structural weaknesses such as high debt and low productivity, as well as its established labor-market underperformance, characterized by high and persistent unemployment and temporary work, largely above levels seen among European peers. To address the latter, the Spanish government adopted a new labor reform at the end of 2021, restoring some of the workers’ rights lost in the past and, above all, addressing the high incidence of temporary work. Since then, the reform has led to a major shift in the employment profile, with a robust increase in permanent contracts. Spain's unemployment rate recently fell to a 15-year low of 11.60%. That said, it is still too early to draw definitive conclusions about the reform and its impact on the functioning of the labor market.

Spain is ranked 31 out of 190 economies in the World Bank's Ease of Doing Business rankings, ahead of other major European economies such as France (33), Italy (58) and Portugal (39). Despite reforms since the 2008‑09 crisis, structural weaknesses persist, particularly an over-reliance on tourism and labor market inefficiencies.

Spain faces higher risks to employment, given the predominance of SMEs — which are more vulnerable to liquidity shocks — and the high share of temporary contracts. Spain relies on EU demand and supply more than other countries and its energy prices have escalated faster than in the Eurozone overall, which worsens the balance of risks. As a result, sectors such as transport, the electro-intensive industry and construction might be significantly affected.

Prolonged political uncertainty could also weigh on activity. With no clear outcome following the general election in July 2023, after the Conservatives failed to secure the expected majority, the formation of a new government may take time. Such political turmoil could ultimately weigh on investor confidence and delay investment.