Spain – 2024-2025 Scenario: activity remains robust

The Spanish economy ended 2023 on a better note than expected at the beginning of the year. The pace of growth slowed in the second half of the year but less significantly and at a later stage than expected. In the second estimate of GDP for the third quarter, the INE confirmed the growth rate at 0.3% quarter-on-quarter (0.4% in Q2). GDP was thus 2.1% higher than in fourth-quarter 2019, before the pandemic. The pace of growth in household consumption and public consumption stands apart from other GDP components, both exceeding 1% quarter-on-quarter. However, investment fell by 1%, and exports of goods and services reflected the weakness of the main trading partners, dipping 4.1%.

The indicators available for the fourth quarter suggest that the momentum of economic activity is similar to that in the previous quarter, consistent with growth of around 0.3%. Growth in activity is expected to stabilise in the next few quarters, coming out slightly higher than in H2 2023. But the strong economic momentum in the latter part of 2022 and early 2023 implies that on an average annual basis GDP growth will slow between 2023 and 2024 from 2.4% to 1.6%. The main support for activity will be domestic demand. Household consumption will be boosted by the rise in real incomes as inflation and wage increases moderate in a relatively dynamic labour market. Investment will also be a key growth driver, largely thanks to the boost lent by investment projects linked to the NGEU programme, the implementation of which is set to pick up speed in 2024 and 2025. Our growth forecasts for private consumption are 1.9% for 2024 and 1.5% for 2025, while investment should climb 2.7% and 2.4%, respectively.  

The contribution of net foreign demand will recover in the coming quarters after a considerably negative contribution in spring and summer 2023. Yet net exports are not expected to boost GDP growth as much as they did in 2023. This is due to the increased momentum expected in exports of non-tourist goods and services (thanks to a gradual improvement in the external environment), which will be offset by a recovery in imports, in part stemming from improved investment, with high import content. Exports of tourist services, already higher than before the pandemic, are expected to slow.  According to our forecasts, the contribution of net exports to growth will be barely negative in 2024 (-0.2%) and zero in 2025.

Regarding the labour market, employment momentum will moderate throughout the forecast horizon in line with the expected trend in activity and assuming a certain recovery in productivity. The unemployment rate will continue to trend downwards, albeit at a slower pace than in recent years. Both the moderation in the pace of job creation and the expected growth in the working population, which will be driven by strong momentum in immigration flows, will contribute to this slowdown in the reduction of the unemployment rate. As a result, unemployment is expected to come out at 11.8% in 2024, lower than the historical average of the last four decades (16.8%) but higher than the low reached in 2007 (8.2%).

In the twelve months to date, the general government deficit stood at 4.2% of GDP at the end of the third quarter (4.5% in June). This figure is still higher than the government's 3.9% target for full-year 2023. We expect a public deficit of -4.1% in 2023 and -3.6% in 2024.