GDP growth is projected at 1.8% in 2024 and 2% in 2025. Private consumption will underpin growth supported by a resilient labour market and real income gains, with inflation projected to fall to 3.0% in 2024 and 2.3% in 2025. Investment will remain weak in 2024, increasing in 2025 due to continuing implementation of the Recovery, Transformation and Resilience Plan (RTRP). Foreign trade will remain subdued. Downside risks include further escalation of geopolitical tensions that worsen demand from Spain’s main trading partners and a slow implementation of the RTRP.

The fiscal deficit is falling, but strengthening the planned fiscal consolidation in 2024 and 2025 is required to keep debt on a downward path and create space for ageing-related and growth-enhancing spending. Population ageing, sluggish productivity growth and low investment weigh on Spain’s growth potential. Boosting growth and productivity requires greater innovation, improving skills, and enhancing education outcomes along with ensuring an effective implementation of the RTRP.

GDP rose by 0.6% (non-annualised) in the fourth quarter of 2023, driven by domestic demand with a notable contribution from government consumption and stockbuilding. Business confidence has recovered since November, and the PMI and social security registrations continued expanding in early 2024. Employment rose by 2.6% over the year to March 2024, while the unemployment rate decreased to 11.5% in February. Consumer confidence remains low. Headline inflation was 3.3% in March 2024, largely reflecting a rebound in prices for utilities due to an increase in VAT on electricity. Core inflation was 3.1% in March 2024.

Export volumes picked up in the last quarter of 2023, after falling in the previous two quarters. Throughout 2023, the trade deficit narrowed on the back of higher non-energy export values and lower energy imports.

The government deficit is projected to decline to 3.3% in 2024 and 2.6% in 2025, with projected consolidation of around 0.3% of GDP over the two years. The government rolled over the 2023 budget for the rest of this year, and partially extended into 2024 the measures to cushion the surge in inflation, slowing fiscal consolidation in 2024. Cuts in gas and electricity taxes and VAT for essential food products were extended into the first and second quarter of 2024, respectively. Public transport subsidies will continue until end-2024. The projection assumes that the measures to address the surge in inflation will end in 2024. The pass-through of monetary policy to financing costs continues to weigh on private sector credit demand. Housing credit to households and credit to firms decreased by 3.0% and 4.3%, respectively, over the year to February 2024.

GDP is projected to grow by 1.8% in 2024, before picking up to 2.0% in 2025. Consumption will be supported by a solid labour market and real income gains. Investment will remain weak in 2024 amid the lagged impact of higher interest rates, but increase in 2025 underpinned by RTRP implementation. Export growth will remain subdued in 2024, improving from 2025 as growth in EU trading partners strengthens. Inflation is projected to fall to 3.0% in 2024 and 2.3% in 2025. The unemployment rate will continue to decline, albeit at a slower pace than in previous years, owing to the expected moderation of job creation and the projected growth of the labour force. Downside risks include a further escalation of geopolitical tensions that could lift energy prices and inflation and worsen demand from Spain’s main trading partners. A slower implementation of the RTRP could restrain growth. On the upside, a faster-than-expected improvement in the international environment would support activity.

The public debt-to-GDP ratio is high, and spending is heavily tilted towards pensions, to the detriment of growth-enhancing items, and ageing-related spending is set to increase. Stronger and sustained fiscal consolidation will be required in the medium term to keep debt on a downward path, comply with proposed EU fiscal rules and create space for future spending priorities. In the short run, to contain fiscal costs, policies to mitigate the impact of the energy price shock should shift to targeted income support for the most vulnerable. To make space for future spending pressures, fiscal consolidation should rely on mobilising additional revenues by gradually broadening the value added tax base and raising environment-related taxes and enhancing spending efficiency. To boost sustainable growth, it is necessary to increase productivity by enhancing innovation, improving skills, and bolstering education outcomes. A revamp of active labour market policies is needed to improve labour matching efficiency and address skill mismatches. Effective implementation of the RTRP would also increase growth prospects.


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