Spain’s Eurozone Economic Performance and Outlook
Spain’s economy has demonstrated remarkable resilience and dynamism within the Eurozone, maintaining robust economic activity through the first half of 2024. This momentum, fueled by strong consumer spending and a thriving tourism sector, is projected to continue propelling growth. The Spanish Gross Domestic Product (GDP) expanded by a healthy 0.8% in the third quarter, a testament to the strength of domestic consumption, even as net exports presented a marginally negative contribution. This positive trajectory highlights Spain’s economic robustness within the euro area.
Overall GDP growth for Spain is anticipated to reach 3.0% this year. This figure is significantly influenced by a strong carry-over from the previous year, 2023. The sustained buoyancy of consumer expenditure is expected to be a key driver, supported by dynamic job creation and increasing real income for Spanish households. Furthermore, the thriving tourism industry, a vital component of the Spanish economy, along with the export of non-tourism services, are poised to bolster the positive contribution of net exports to Spain’s GDP growth throughout 2024. This economic vigor positions Spain as a significant contributor to the Eurozone economy.
Looking ahead, while economic activity in Spain is projected to moderate to 2.3% in 2025 and further to 2.1% in 2026, these growth rates remain vigorous and indicative of a healthy economic expansion. Domestic demand is forecast to be the primary engine of this expansion, underpinned by consistent consumption growth and a projected broad-based recovery in investment. This investment rebound is expected to be facilitated by the more effective implementation of the Recovery and Resilience Plan (RRP), the sound financial standing of Spanish non-financial corporations, and the continued easing of financing conditions within the Eurozone’s monetary policy framework. However, the anticipated recovery in import growth is likely to temper the contribution of external demand to Spain’s GDP growth in both 2025 and 2026.
Potential downside risks to Spain’s economic outlook include the possibility of slower growth among Spain’s primary trading partners within the Eurozone and globally. This could negatively impact the dynamism of Spanish economic activity, particularly the crucial tourism sector. Conversely, a faster-than-expected decrease in the elevated household savings rate towards its long-term average could inject additional impetus into consumption, further boosting the Spanish economy. At the same time, persistent risk aversion within the private sector could potentially restrain investment growth over the forecast period. These factors are crucial considerations for Spain’s continued economic success within the euro framework.
The Spanish labor market’s robust performance has extended into 2024, with job creation accelerating sharply in the first half of the year and maintaining momentum into the third quarter. Employment growth is projected to expand by 2.3% in 2024, significantly supported by continued strong immigration flows, a factor influencing labor dynamics across the Eurozone. The unemployment rate in Spain is projected to steadily decline over the forecast horizon, reaching 10.7% in 2026, down from 11.5% in 2024. Nominal wage growth is expected to outpace inflation in 2024, resulting in real income gains for Spanish workers, although this growth in real income is projected to moderate in 2025 and 2026.
Inflation in Spain, as measured by the Harmonized Index of Consumer Prices (HICP), is projected to decrease to 2.8% in 2024. This decline is largely driven by the ongoing deceleration of energy and food price inflation, trends observed across the Eurozone. Underlying price pressures have eased more gradually, particularly in services sectors related to hospitality and transport. Headline inflation is expected to continue slowing down in 2025, reaching 2.2%, with the downward trend of underlying components anticipated to persist in the coming quarters, before easing further to 2.0% in 2026. This inflation trajectory is a key concern for the European Central Bank and its monetary policy within the Eurozone.
After reaching 3.5% of GDP in 2023, Spain’s general government deficit is projected to continue decreasing in 2024, falling to 3.0%. This reduction is primarily due to the phasing out of most measures implemented to mitigate the economic and social impacts of high energy prices, aligning with broader Eurozone fiscal consolidation efforts. The revenue-to-GDP ratio is expected to increase, partly due to the withdrawal of reduced VAT rates and the special tax on electricity, as well as the removal of the exemption from the tax on the value of electricity. The phasing out of fuel rebates is also contributing to expenditure savings. Potential risks to these projections are related to the extent of nationally-financed expenditure required to address the impacts of recent floods in the Valencian Community.
Based on current policies, the government deficit in Spain is forecast to decline further in 2025, reaching 2.6% of GDP, despite a slight increase in interest expenditure. This continued decline is driven by slower growth in nationally-financed primary expenditure and positive developments in tax revenue, particularly from direct taxation, boosted by robust nominal GDP growth. In 2026, the general government deficit is projected to slightly increase to 2.7% of GDP, primarily due to the anticipated expiration of levies on banks and energy companies. Managing government deficits and debt levels is a critical aspect of Spain’s fiscal policy within the Eurozone stability framework.
The statistical revision conducted recently has reduced Spain’s 2023 general government debt by almost 3 percentage points, bringing it down to 105.1% of GDP. The debt-to-GDP ratio is projected to continue narrowing in 2024 to 102.3%, thanks to strong nominal GDP growth outpacing the cost of servicing the debt. This ratio is expected to continue decreasing more gradually in 2025-2026, reaching around 101.1%, due to a less favorable interest-growth rate differential. Spain’s efforts to reduce its debt-to-GDP ratio are crucial for long-term economic sustainability and its position within the Eurozone.