Spain flag Spain: Economic and Political Overview

The economic context of Spain

Economic Indicators

Spain has been in the midst of a balanced economic recovery in recent years; although the COVID-19 crisis led the country into an unprecedented downturn in economic activity, with the deepest contraction among EU member states. Nevertheless, the Spanish economy recovered well from the crisis, growing by 5.8% in 2022 and an estimated 2.5% in 2023, driven by external and domestic demand, benefiting also from a strong carry-over from 2022 and a marked improvement in the terms of trade. Domestic demand, driven by increased real income for households and ongoing relief from price pressures, should be the key growth driver this year. The extended implementation of the Recovery and Resilience Plan, coupled with a faster disbursement to ultimate recipients, is projected to bolster investment, particularly in machinery and equipment. Consequently, GDP is predicted to grow by 1.7% in 2024 (still above eurozone average), with a slight acceleration to 2% in 2025 according to the EU Commission, as the recently approved RRF loan component adds further impetus to growth-oriented expenditures.

In 2023, the anticipated decline in the general government deficit was projected to be more gradual compared to the preceding years. Despite robust personal income tax revenues, overall tax revenues are exhibiting signs of moderation after a period of buoyant growth, primarily due to lower-than-expected growth in indirect tax revenues, influenced by the slowdown in the inflation of imported goods. On the expenditure side, the increase in current expenditure was propelled by rising pension costs linked to inflation indexation and growing intermediate consumption. Additionally, the government approved two additional packages of measures, costing an estimated EUR 2.7 billion (0.2% of GDP), aimed at alleviating the impact of high energy prices. These measures included an extension of the VAT reduction for basic food items and direct support for the road and maritime transport sectors. Overall, the budget deficit was estimated at 3.9% of GDP last year, with a further reduction expected in 2024 (2.9%) due to savings from the phasing out of energy-related measures. The trajectory for the debt-to-GDP ratio in 2023 indicated a decline, reaching 107.3% (from 111.6% one year earlier), which should continue over the forecast horizon. This stabilization is attributed to the diminishing favorable gap between nominal GDP growth and the cost of servicing debt. In 2023, HICP inflation saw a reduction to 3.6%, primarily influenced by the ongoing moderation of the energy component. For 2024, there is an anticipated further slowdown in HICP inflation to 3.4%, even with the upward pressure resulting from the expected phasing out of government measures implemented in preceding years to counter the impact of high energy prices. As we move into 2025, HICP inflation is forecasted to average 2.1% (data EU Commission).

The labor market was resilient in 2023, supported by sustained job creation and a decrease in the proportion of temporary employees in the private sector, despite a slowdown in employment growth observed since the summer. The unemployment rate was estimated at 11.8% in 2023 and is expected to continue improving in the forecast period, reaching 11.3% and 11.1% in 2024 and 2025, respectively (IMF). Wages are anticipated to experience a moderate increase, aligning with the thresholds outlined in the multi-year agreement signed last May, with no significant impact on cost-competitiveness. Spain remains a country with strong inequalities: according to the latest data by Eurostat, 26% of the population is at risk of poverty or social exclusion (the fourth-highest level in the EU), despite a relatively high GDP per capita (USD 50,472 in 2023 – IMF).

 
Main Indicators 20222023 (E)2024 (E)2025 (E)2026 (E)
GDP (billions USD) 1,418.921,581.151,647.111,715.581,772.09
GDP (Constant Prices, Annual % Change) 5.82.51.92.11.8
GDP per Capita (USD) 29,80033,07134,04535,07235,852
General Government Balance (in % of GDP) -4.5-3.7-3.2-3.2-3.3
General Government Gross Debt (in % of GDP) 111.6107.5106.3104.9105.0
Inflation Rate (%) 8.33.42.72.41.9
Unemployment Rate (% of the Labour Force) 12.912.111.611.311.0
Current Account (billions USD) 8.6841.1141.7040.3834.40
Current Account (in % of GDP) 0.62.62.52.41.9

Source: IMF – World Economic Outlook Database, October 2021

Main Sectors of Industry

Agriculture contributes around 2.3% of the Spanish GDP and employs 4% of the workforce (World Bank, latest data available). The country is home to almost one million agricultural and livestock businesses, covering 30 million hectares of land. Spain is the world's largest producer of olive oil and the world's third-largest producer of wine. The country is also one of the largest producers of oranges and strawberries in the world. The main crops are wheat, sugar beet, barley, tomatoes, olives, citrus fruits, grapes and cork. Livestock is also important, especially for pigs and cattle: Spain accounted for about one-quarter of the EU's pig (25.4%) and sheep (24.5%) populations in 2022 (EU Commission). Data by the Agricultural Ministry shows that land destined for biological cultivation accounts for 10.79% of the total arable land, with 58.485 active operators in the sector (in production or distribution). Spain's agricultural and food industry has faced challenges attributed to drought and the repercussions of a substantial increase in production costs during 2021-2022, initially stemming from the pandemic and subsequently exacerbated by the conflict in Ukraine. These dual factors had a notable impact on the gross value added (GVA) of the primary sector in 2022, witnessing a decline of 19.8% in real terms (–5.7% in nominal terms). However, there was a modest improvement in GVA during the first half of 2023, with a year-on-year decrease of –4.7%, partly due to the stabilization of production costs.

The industrial sector accounts for 20.8% of GDP and employs one-fifth of the active population. Manufacturing as a whole is the most important sector as it accounts alone for around 11% of GDP (World Bank). The industrial sector is dominated by automotive, textiles, industrial food processing, iron and steel, naval machines, and engineering. Spain is the second-largest automotive manufacturer in Europe, with exports accounting for over 60% of production. New sectors such as outsourcing of electronic components production, information technology, and telecommunications provide high growth potential. The renewable energy sector is also growing at a fast pace.

The tertiary sector contributes 67.9% of the GDP and employs 76% of the active population. The tourism sector is pivotal for the country’s economy, being Spain’s main source of income, as the country is the second-most popular tourist destination in the world. According to the latest official figures, tourism contributes 11.7% of GDP and employs 12.2% of the total number of national insurance contributors in Spain. During 2022, Spain welcomed 71.6 million international visitors, marking a substantial annual growth of 129.5%. However, this figure remains below the pre-pandemic level of 83.7 million recorded in 2019. The banking sector is also important and is composed of ten banking groups under the direct supervision of the Single Supervisory Mechanism (representing more than 90% of the industry) and 48 private banks, 2 saving banks and 61 cooperative banks supervised by Banco de España (European Banking Federation).

 
Breakdown of Economic Activity By Sector Agriculture Industry Services
Employment By Sector (in % of Total Employment) 4.1 20.2 75.8
Value Added (in % of GDP) 2.4 20.8 67.7
Value Added (Annual % Change) -1.1 3.3 6.5

Source: World Bank, Latest Available Data. Because of rounding, the sum of the percentages may be smaller/greater than 100%.

 

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Indicator of Economic Freedom

Definition:

The Economic freedom index measure ten components of economic freedom, grouped into four broad categories or pillars of economic freedom: Rule of Law (property rights, freedom from corruption); Limited Government (fiscal freedom, government spending); Regulatory Efficiency (business freedom, labour freedom, monetary freedom); and Open Markets (trade freedom, investment freedom, financial freedom). Each of the freedoms within these four broad categories is individually scored on a scale of 0 to 100. A country’s overall economic freedom score is a simple average of its scores on the 10 individual freedoms.}}

Score:
69,9/100
World Rank:
39
Regional Rank:
24

Economic freedom in the world (interactive map)
Source: Index of Economic Freedom, Heritage Foundation

 

Business environment ranking

Definition:

The business rankings model measures the quality or attractiveness of the business environment in the 82 countries covered by The Economist Intelligence Unit’s Country Forecast reports. It examines ten separate criteria or categories, covering the political environment, the macroeconomic environment, market opportunities, policy towards free enterprise and competition, policy towards foreign investment, foreign trade and exchange controls, taxes, financing, the labour market and infrastructure.

Score:
7.44/10
World Rank:
27/82

Source: The Economist Intelligence Unit - Business Environment Rankings 2020-2024

 

Country Risk

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Latest Update: June 2024

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