Spain's economy is thriving: Why it's growing more than its EU rivals

Spain's economy is projected to grow by 1.7% in 2024
Spain's economy is projected to grow by 1.7% in 2024 Copyright Alvaro Barrientos/Copyright 2019 The AP. All rights reserved
By Piero Cingari
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The Spanish economy is thriving, with tourism, domestic spending, and investment set to continue propelling growth this year.


Spain's economy is witnessing a positive momentum, outshining its European peers with robust growth figures, buoyed by a healthy domestic consumption and a strong investment climate.

Spain's IBEX 35 Index has reached its highest point since May 2017. Additionally, Spanish house prices rose by 4.2% in 2023, well above the pace seen in other European markets.

In the final quarter of 2023, the Spanish economy advanced at 0.6% annual pace, following a 0.4% expansion in the preceding period. This growth surge was predominantly powered by resilient domestic demand, defying persistent inflationary pressures and elevated interest rates.

Remarkably, Spain's growth trajectory far surpassed the eurozone and EU averages, both stagnating at 0%. Moreover, Spain witnessed one of the strongest increases in new employment in Europe during the fourth quarter of 2023, trailing only behind Romania (+1.5%) and Malta (+1.4%).

Retail sales in the Iberian nation soared by 1.9% year-on-year in February 2024, marking the 15th consecutive annual increase. However, while Spanish inflation has notably retreated from the double-digit rates seen in 2022, it still hovers significantly above pre-pandemic levels.

Despite a reduction from the double-digit inflation rates seen in 2022, Spain's inflation remains above pre-pandemic levels.

In March 2024, Spain's consumer price inflation rate rose to 3.2% year-on-year, aligning with market projections and edging up from February's six-month low of 2.8%. Yet, the core inflation rate, excluding volatile components such as food and energy, tapered to 3.3%, the lowest level since February 2022.

Assets surge: Bonos-Bund spread falls below 10-year average

On the financial front, Spanish assets are basking in a period of remarkable performance. 

The IBEX 35 Index, comprising the 35 largest Spanish companies by market capitalisation, surged by approximately 11% in March, marking four consecutive weeks of gains and scaling heights not witnessed since May 2017.

Furthermore, the spread between Spain's 10-year Bonos and German Bunds hovered around 85 basis points by the end of March, after touching lows unseen since February 2022 and dipping below its ten-year average.

Meanwhile, ING economist Wouter Thierie noted that Spanish house prices saw an average increase of 4.2% in 2023, bucking the trend observed in many eurozone countries where average house price growth was negative last year, largely as a consequence of rising interest rates.

"There is room for further price increases due to falling variable interest rates, especially if the ECB starts cutting interest rates later this year. In addition, a growing number of Spanish households will also contribute to tightness in certain regions, which will support house price growth this year," Thierie wrote.

Moody’s revises Spain’s outlook to positive

Spain's overall economic momentum prompted Moody's to revise the outlook on the Government of Spain to positive from stable in March, maintaining a rating of Baa1.

The rating agency highlighted Spain's low private sector leverage, a strong banking sector, a current account surplus, and an improved labour market as key strengths. However, it also pointed out Spain's challenges, such as a higher debt burden and structural issues like an ageing population, which could impact fiscal stability.

According to the latest Eurostat estimates, Spain's economy is projected to grow by 1.7% in 2024 and 2% in 2025, surpassing the European Union's average of 0.9% and 1.7%, respectively.

Eurostat emphasised that consumption and investment will be the primary drivers of economic expansion this year, with private consumption buoyed by real income gains and the utilisation of accumulated household savings, while investment growth will be supported by the broadening implementation of the Recovery and Resilience Plan.

On the inflation outlook, Spain is anticipated to see a moderation, with an average headline inflation of 3.2% for the year, slightly above the European Union's average of 3%. Spanish inflation is expected to decline to 2.1% in 2025, falling below the averages for both the European Union (2.5%) and the euro area (2%).

Despite the underlying price pressures trending downwards, the gradual removal of government measures aimed at mitigating high energy prices might temporarily push inflation upwards.

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