Economic activity to remain robust
The Spanish economy posted growth of 2.5% in 2023. The strong outturn was underpinned by robust labour market developments which sustained private consumption, as well as by the contribution from net exports and public consumption. Amid the high interest rates environment and general uncertainty, overall investment growth was subdued, particularly in the second half of the year. This was notably the case for equipment and machinery as well as residential construction.
In the first quarter of 2024, real GDP recorded a quarterly growth of 0.7%, largely driven by the contribution from external demand. Economic activity is forecast to expand by 2.1% overall this year, with domestic demand set to be the main growth driver. Private consumption is expected to be supported by continued job creation and the gradual reduction of the household savings rate. Investment growth is projected to improve in 2024 underpinned by the acceleration in the implementation of the RRP and the expected easing of financing conditions, benefitting also from the healthy financial position of non-financial corporations. The weak economic situation in Spain’s main trading partners would limit the dynamism of overall exports and the contribution to growth from external demand, despite the expected positive developments of tourism activity and the export of non-tourism services throughout the year. Real GDP growth is projected to slightly decelerate in 2025 to 1.9%.
Downside surprises in the evolution of economic activity in Spain’s main trading partners could adversely impact the outlook for activity, affecting external demand and private investment. Moreover, in view of the impact of recent years’ interest rate hikes, a persistent precautionary behaviour from the private sector with a preference for further deleveraging poses downside risks to investment growth. On the other hand, a gradual normalisation of non-financial corporations’ investment level and of the still elevated households’ savings ratio over the forecast horizon have the potential to provide additional impetuous to domestic demand.
Strong labour market and declining unemployment
The 2023 positive performance of the labour market continued into 2024. Job creation increased sharply in the first two quarters of the year, before moderating slightly in the second half. In annual terms, employment expanded by 3.2%, supported by continued strong migration flows. The unemployment rate fell to 12.1% last year and is projected to continue to decline further, although remaining at an elevated level, reaching 11.6% in 2024 and 11.1% in 2025. Following the strong recovery of real household purchasing power last year, nominal wage growth is expected to moderate in 2024 and 2025, but to remain marginally above inflation.
Headline and underlying inflation decelerate further over the forecast horizon
Headline inflation declined to 3.4% on average in 2023, favoured by the sustained slow-down in energy prices. It is projected to further decelerate this year, reaching 3.1%, with the continued easing of price pressure from non-energy and food components. At the same time, the phasing out of most government measures to mitigate the impact of high energy prices is expected to exert upward pressure on inflation. Headline inflation is forecast to decrease further to 2.3% in 2025.
Government deficit to decrease with the phase-out of energy measures
The general government deficit continued to decrease in 2023 (to 3.6% of GDP from 4.7% in 2022), driven by the declining cost of measures to mitigate the impact of high energy prices and by favourable macroeconomic developments boosting revenues. The 11% growth in taxes on income and wealth, which reflects the strong increase of corporate profits and a robust labour market, drove the reduction of the deficit on the revenue side. On the expenditure side, savings from the most targeted energy-related measures (whose budgetary cost decreased by 0.6 pps. to 0.9% of GDP) were the main contributor to the deficit decline.
In 2024, the government deficit is set to keep decreasing to 3.0%, as energy-related measures are almost entirely phased out (by 0.7 pps. to 0.2% of GDP). Most measures of direct support for companies have already been unwound and the VAT cuts on electricity and gas as well as the reduction of the special tax on electricity are being gradually phased out. The positive direct taxation developments, underpinned by continued job creation and higher salaries and pensions, are set to continue and will be accompanied by the recovery of indirect tax revenues, benefiting from the end of energy-related tax cuts.
The government deficit is expected to decrease more moderately in 2025, based on unchanged policies, to 2.8%. Savings from the phase out of the remaining measures to mitigate energy prices (0.3 pps.) are set to contribute to the deficit reduction, mitigated by somewhat higher expenditure on intermediate consumption, interest and social benefits other than in kind.
