The government deficit is projected at -2.8% of GDP in 2025, narrowing to -2.5% in 2026, thanks to higher tax revenues and the gradual withdrawal of support measures. Public debt has declined from 119.3% of GDP in 2020 to 101.6% in 2024 but is likely to stabilize near current levels due to rising pension costs and new spending commitments. Political fragmentation has led to repeated budget rollovers, with the 2023 budget extended into 2026, delaying fiscal normalization and complicating reforms. 

On the corporate side, business insolvencies have stabilized after a sharp rebound in 2024. The bulk of cases remains concentrated in trade, construction, manufacturing and hospitality. We expect a modest rise in 2026 and 2027 as economic growth decelerates. Credit conditions are easing, but corporate profitability is under pressure from margin compression, highlighting the need for continued financial discipline.

Spain has leveraged its services-based economy and robust tourism sector to drive growth and resilience, though it has become highly reliant on the sector. Tourism revenues reached record highs in 2024, exceeding EUR120bn, supported by both pent-up post-pandemic demand and improvements in the quality and diversity of tourism offerings. 

Despite ongoing challenges such as sluggish productivity growth and a fragmented labor market, Spain’s continued investment in digital and green transitions, supported by substantial EU funding, positions it well for future competitiveness. However, there are concerns over Spain’s ability to fully absorb its EUR164bn NGEU allocation before the 2026 deadline, with just over 40% disbursed so far. Missing out would mean lost opportunities for investment and reform, potentially limiting long-term growth.

Spain’s open economy is closely linked to Latin America through strong trade and investment flows, supported by historical and cultural ties. Spanish multinationals play a major role in sectors such as banking, energy and telecommunications, reinforcing Spain’s position as a bridge between Europe and the region. These connections enhance the internationalization of Spanish firms and provide Latin American economies with greater access to European markets and expertise.

The current minority government depends on support from smaller regional parties, making policy implementation unpredictable and limiting progress on structural and budgetary reforms. This environment is likely to persist until the next general elections in 2027, with the risk of further fragmentation and policy gridlock. Despite these challenges, Spain’s external position and macroeconomic fundamentals remain strong, as reflected in a recent credit rating upgrade. However, the political landscape will continue to weigh on investor confidence and the pace of reform. The success of the NGEU program and broader economic transformation will depend on overcoming administrative bottlenecks and ensuring political stability. The 2027 elections will be a critical juncture for Spain’s policy direction and its ability to address long-standing structural weaknesses.