Spain Country Risk Report

Despite the challenges posed by Russia’s war against Ukraine, the Spanish economy has remained resilient. Economic data for Q4 indicates a continuation of Q3 momentum. The economy experienced a slowdown in Q3 of 2023, influenced by a weakening global environment and the impact of monetary tightening. However, it still grew at a robust rate. The INE’s preliminary GDP data showed a +0.3% q/q growth in Q3, surpassing the Eurozone average (-0.1%). We expect GDP to have grown by +2.4% in 2023, and to grow by +1.5% and +1.8% in 2024 and 2025, respectively.

Throughout the forecast period, Spain’s economic activity will largely be driven by domestic demand. Enhanced household consumption, fueled by real income increases due to lower inflation rates, and job creation; wage growth in a robust labor market will also play a significant role. Additionally, gross fixed capital formation will contribute substantially to growth, spurred by NGEU investment projects gaining momentum in 2024 and 2025. While net external demand will improve in the short term, its overall contribution to GDP growth will be more moderate compared to previous years, as an increase in goods and non-travel services exports will be balanced by a rise in imports (linked, inter alia, to the increase in the import content of gross fixed capital formation) and a levelling off in travel service exports.

Headline inflation is expected to remain on a slightly upward path in early 2024 and to resume a downward path in the second half of the year. We expect it to have reached 3.6% in 2023 and to reach 3.4% in 2024. Under the baseline scenario it is assumed that both the lower VAT rate on food and the public transport subsidies will be extended. A potential extension of the energy price measures could further temper inflation and boost activity in 2024.

The country continues to face challenges due to structural weaknesses such as high debt and low productivity, as well as established labor-market underperformance, characterized by high and persistent unemployment and temporary work, largely above levels seen in 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 problem of the high incidence of temporary work in the country. To date, we note that the reform has led to a major shift in the employment profile, with a robust increase in permanent contracts and Spain’s unemployment rate recently fell to a 15-year low of 11.60%. That being 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 country and energy prices have escalated faster than in 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.

Following Pedro Sánchez’s re-election as Spain’s Prime Minister in November 2023, Spain’s political stability is expected to improve in the short term. Sánchez, leading the Spanish Socialist Workers’ Party, secured a majority in the first investiture vote, exceeding his 2020 support. This victory positions him to lead until 2027. However, reliance on multiple regional parties, each with distinct interests, could make the government inherently unstable and susceptible to policy paralysis. The likelihood of government collapse before the term’s end may increase over time due to these complexities.