Home Finance Spain’s Upbeat Outlook Is a Rare Bright Spot Among Eurozone Economies

Spain’s Upbeat Outlook Is a Rare Bright Spot Among Eurozone Economies

by internationalbanker

By Nicholas Larsen, International Banker


On May 1, Fitch Solutions upgraded its 2024 forecast for the Spanish economy, stating that gross domestic product (GDP) will expand by 2.2 percent in 2024 instead of the 1.5 percent it had predicted previously. This follows the healthy 2.5-percent growth rate recorded by the Southern European nation for 2023. With a myriad of key factors underpinning this revised, upbeat outlook, including stronger domestic consumption, a thriving tourism sector and a buoyant labour market, moreover, Spain’s economy in 2024 distinctly stands out as a rare bright spot amid the eurozone gloom. 

With real GDP growth for 2024’s first quarter (Q1) registering at 0.7 percent quarter-over-quarter and 2.4 percent year-on-year, Fitch acknowledged that Spain’s performance well exceeded its expectations, as well as Bloomberg’s consensus estimate (which suggested only 0.4-percent quarterly growth) and those of many other important institutions, including the Bank of Spain, the OECD (Organisation for Economic Co-operation and Development) and the European Commission (EC). The main underlying factors for this stellar Q1 quarter-on-quarter growth were the strength of the foreign sector, which accounted for 0.5-percent growth, as tourism performed particularly well, along with household consumption, which grew by 0.3 percent. Investment, meanwhile, rebounded by 2.6 percent during the January-March quarter, having previously suffered two quarters of contractions.

Spain’s strong Q1 performance is particularly laudable given the long-term struggles of much of the rest of the eurozone that continue to be acutely felt in 2024, including persistently above-target inflation and higher-for-longer interest rates. Indeed, Spain’s minister of economy, trade and business, Carlos Cuerpo Caballero, highlighted that the strong quarterly growth confirmed Spain’s “differential” growth versus the other eurozone economies, “something that is especially relevant in the international environment of high uncertainty that we are experiencing”. Cuerpo added that this growth “puts us in an optimal position to meet the government’s growth target for 2024, which stands at 2 percent”.

Compared to its previous quarterly update, Fitch also decisively upgraded its outlook for the Spanish economy in its latest assessment published on May 1, attributing this improvement largely to its stronger projection for private consumption this year than it had previously anticipated. “Domestic demand stayed stable, contributing 0.7 percentage points (pp) to quarterly growth in Q124, while the external sector added 0.5pp despite a slight quarterly slowing in export growth from 2.8 percent to 2.4 percent,” Fitch company BMI Industry Research (Fitch Solutions) noted. “Looking ahead, we expect that 2024 will see private consumption expand further as it capitalises on 2023 gains in employment and nominal wages as well as easing inflationary pressures.”

Strong growth in housing demand has also been an important pillar of Spain’s growth in recent quarters, with ING highlighting how this has helped to bolster residential investments. “Strong housing demand growth continues to outpace housing supply growth,” ING analysts wrote in late March. “Finally, government spending also increased, and the net trade position improved. Looking at the details by sector, interest rate-sensitive sectors such as manufacturing and construction grew strongly in the fourth quarter, against expectations.”

Indeed, Fitch highlighted annualised industrial production as a key driver of Spain’s growth on the supply side, with modest expansions in January and February following a trough in December 2023. “The Purchasing Managers’ Index (PMI) for manufacturing has ticked into expansionary territory in February 2024, and the composite index remains well above the 50.0 threshold (separating contraction and expansion) at 55.3 points in March 2024 (up from 53.9 points in February),” the credit-rating firm added in its May 1 assessment. “The service sector, which has been a main driver of economic growth in Spain in 2023, remains relatively resilient. The services PMI continues its ascension in expansionary territory at 56.1 points in March 2023.”

Banco Bilbao Vizcaya Argentaria (BBVA), meanwhile, recently identified the country’s strong export sector as a key contributory factor to Spain’s outperformance vis-à-vis the rest of the eurozone, particularly on the services side. “The tourism abroad continues to show surprising strength: spending data with foreign cards suggests that the non-resident consumption growth was increasing by 5 percent quarter-on-quarter in real terms at the beginning of [the] year,” BBVA Research explained in a press article dated March 11. “In addition, the rest of service exports, which include consulting, information technology and communication, financial services, etc., and which have a greater weight than foreign tourism (7.6 percent of GDP, compared to 5.0 percent), show an increasing trend (0.5 percent in Q1 ‘24).”

BBVA also pointed to the increasingly service-oriented nature of Spain’s household spending in recent years, which is proving crucial for the country’s robust economic performance this year. The Spanish lender noted that four of the five components that have gained the most weight within the basket of consumption of Spanish families since 2019 fall under the services sector, including catering, outpatient services, and financial and social protection. Meanwhile, the biggest reductions in spending have been observed in goods, such as clothing, food, vehicles and footwear. “This redirection of spending is particularly benefiting the Spanish economy, which is intensive in service provision,” BBVA Research added.

Nonetheless, downside risks to Spain’s outlook persist—the biggest one arguably being political, with the Socialist Workers’ Party’s (PSOE’s) Pedro Sánchez, who was re-elected as prime minister in November—a full four months after July’s parliamentary elections, heading up a decidedly fractured coalition government alongside the far-left Sumar party. To garner votes, the coalition reached out to regionalist parties and is thus supported by the ERC (Republican Left of Catalonia) and Junts (Together for Catalonia) from Catalonia, the PNV (Basque Nationalist Party) and EH Bildu from the Basque Country, the BNG (Galician Nationalist Bloc) from Galicia and Coalición Canaria from the Canary Islands. With so many parties to appease, therefore, the ability to get legislation passed could prove decidedly tricky.

Indeed, coalition talks late last year delayed the 2024 budget approval, while the government decided again in March not to send the budget bill to the Spanish Parliament (Cortes Generales) and instead roll over the 2023 budget for the rest of the year after the Catalonia region called an early election that could further damage Sanchez’s support in Parliament. Such a move underscores the political deadlock in Spain’s government that could translate into a potentially significant drag on Spain’s economic prospects over the coming months.

While S&P Global Ratings affirmed its ‘A/A-1’ credit rating for Spain on March 15, it also warned that this rating could be lowered in the future if the economy’s external position and the government’s budgetary position deteriorate against expectations, most likely as a result of “significant and negative budgetary slippages”, as well as “an unexpected deterioration of Spain’s current account, slowing external deleveraging or increasing external liquidity risks”. That said, Spain’s rating could be lifted “if the sovereign’s external position strengthens, government debt to GDP declines at a faster pace than currently expected, while Spain’s commercial banking system remains solid and largely domestically funded (in net terms)”. As such, S&P noted that its affirmation reflects the counterbalancing of diverging factors in its assessment of Spain’s creditworthiness.

“The fragmented political landscape could hinder the implementation of reforms, including those related to the National Reform Plan, required for disbursement of the remaining Recovery and Resilience Facility (RRF) grants, clouding economic growth prospects and delaying structural budgetary consolidation,” S&P wrote as part of its March 15 rating assessment for Spain. “At the same time, Spain’s gross general government debt reduction is relatively slow in spite of strong nominal growth. Despite these weaknesses, Spain’s economy has performed well in the face of a series of shocks and steady external deleveraging. The rating is also underpinned by Spain’s large and diversified economy and institutional strength in the eurozone membership context.”

Since then, however, Spain’s political vulnerability was further exposed when corruption allegations against Sanchez’s wife prompted the prime minister to suspend his duties from April 24 until April 29. Although he did confirm that he will continue in office, which, in turn, has helped to boost confidence in Spain’s governance in the interim, such events highlight the potentially fragile, fractured nature of Spain’s present political environment.

“The Prime Minister’s resignation would have left Spain without an immediate successor, further policy uncertainty, and likely a snap election as parties would have struggled to build a cohesive governing coalition. The decision to remain in office will ensure the continuity of policy and prevent another election in the space of less than a year,” Fitch noted on April 29. “We highlight, however, that Sánchez still heads up an unstable minority government that took four months to form and has had limited success in passing policy. This to us suggests that any certainty this event provides will be short-lived and the government will continue to struggle with policy formation.”

Fitch also cited tight financial conditions and weaker net trade as likely constraints on Spain’s economy in 2024. “While the Spanish economy returned to its pre-pandemic size in Q3 ‘22, we think that still tight financial conditions as well as a weak external demand backdrop from the eurozone and potentially the US will weigh on Spain’s economy,” Fitch stated. “Even with our upward revisions, we see Spanish GDP growth to remain below trend until at least end-2025, which informs our forecast for the Spanish economy to grow by 2.0 percent in 2025.”


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