OECD Economic Outlook, Volume 2023 Issue 2

Spain

GDP is projected to grow by 1.4% in 2024 and 2.0% in 2025. Domestic demand will be the key driver of growth. Private consumption and investment growth will moderate due to tight financial conditions and persistent inflation in 2024, before picking up in 2025. External demand will be less supportive of growth than in previous years. Inflation is projected to slightly increase to 3.7% in 2024, before decreasing to 2.3% in 2025.

The fiscal deficit is falling over the projection period, but stronger and sustained fiscal consolidation is needed to keep debt on a downward path and create space for ageing-related and growth-enhancing spending. To increase productivity and innovation, efforts should be targeted at fostering R&D projects through partnerships between firms and research institutes, and reducing regulatory differences across regions.

The economy is slowing

GDP increased by 0.3% in the third quarter of 2023. Business confidence indicators have been sluggish since the spring and business activity surveys show weaker developments across sectors since July. Consumer confidence remains low. The labour market is robust, with employment growing at an annual rate of 2.6% in October, reflecting a higher employment rate and the incorporation of immigrants in the labour force. The unemployment rate increased to 11.8% in September 2023. Nominal wages increased by 4.3% over the year to the third quarter of 2023. Inflation has moderated significantly but increased from 2.1% in July 2023 to 3.5% in October, driven by higher energy prices and base effects. Core inflation has gradually moderated, reaching 3.8% in October 2023.

Spain: Inflation and economic growth indicators

Source: Instituto Nacional de Estadistíca; Eurostat; and OECD Economic Outlook 114 database.

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Spain: Demand, output and prices

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Export and import growth have decreased in recent quarters as activity in Spain’s main trading partners has eased. Monetary policy tightening is influencing activity. Credit standards for loans to enterprises and consumers have tightened and loan costs have increased for all sectors. Housing credit to households and credit to firms decreased by 3.4% and 4.7% respectively over the year to September 2023. Households are highly exposed to rising interest rates, with 70% of mortgages on variable rates.

Mild fiscal consolidation is underway

The government deficit is projected to decline to 3.2% in 2024 and 3.1% in 2025. Measures to curtail inflation have been prolonged until end-2023, including a EUR 200 cheque for low-income households, a VAT cut for essential food products and targeted support to specific sectors. In addition, previous tax cuts on gas and electricity and some subsidies on transport fees have been extended. Most of these measures are expected to end in December 2023, with tax cuts on energy and food expected to be phased out in the first half of 2024.

Growth is moderating, but will remain solid

GDP is projected to moderate to 1.4% in 2024, before picking up to 2.0% in 2025. Restrictive monetary policy along with less supportive fiscal policy will slow private and public consumption in 2024. Investment will also slow due to tight credit and financial conditions. Net exports are expected to improve from 2025, helped by stronger growth in the main EU trading partners. The gradual decrease in inflationary pressures, along with the resilience of the labour market and the deployment of projects under the Recovery, Transformation and Resilience Plan (RTRP) will support growth in 2025. Inflation is expected to pick up in the first half of 2024 as the measures to curtail energy price inflation will be gradually phased out from December 2023, but will decrease again towards the end of 2024 and in 2025. Core inflation is expected to remain high in 2024 due to the lagged effect from the pass through of higher energy prices, but fall in 2025. The outlook is surrounded by significant risks. A further escalation of geopolitical conflicts could push up energy prices and inflation and worsen the economic outlook in Spain’s main trading partners. Slow implementation of the RTRP could restrain growth more than expected. On the upside, a faster‑than‑expected improvement in the international environment and a greater impact from the RTRP funds would support activity.

Public debt needs to be reduced further

Stronger and sustained fiscal consolidation is needed to maintain debt on a downward path and create space for growth-enhancing spending. Ageing-related spending is estimated to increase by 2.7% points of potential GDP from 2024 to 2040. Sizeable fiscal support helped to mitigate the effects of the inflationary shock on business and households, but the support should end as planned. Efforts to foster R&D projects through partnerships between firms and research institutes and reduce regulatory differences across regions would improve productivity and innovation. Improving skills and enhancing education outcomes can enhance job prospects, especially for the youth, and should be prioritised together with more efficient active labour market policies. Fulfilling the country’s objectives to fight climate change will require a more environment-friendly tax regime, with a broader taxation base and fewer exemptions, and gradually increasing tax rates on non-ETS emissions.