The two sides of Spain’s economic growth

The Spanish economy continues to perform better than expected. Amid European stagnation, the IMF raises Spanish growth to 2.9 per cent by 2024, yet this economic bonanza does not translate into a significant improvement in citizens’ purchasing power. What explains this discrepancy?

 

For years, the Spanish economy has been experiencing remarkable growth that, at least on paper, appears to be a success. It has become the engine powering growth in the eurozone, outperforming its European neighbours, especially Germany, which represents the weak point of a resilient global economy.

The latest report from the International Monetary Fund (IMF) upgrades the Bank of Spain’s projections and raises Spain’s growth by half a percentage point to 2.9% in 2024, the largest growth improvement among advanced economies. This puts the Spanish economy well ahead of the growth forecast for Germany, France, Italy, and the eurozone as a whole, and even ahead of the United States and the United Kingdom.

 

Growth driven by tourism, consumption, and investment

Spain’s exceptional performance is due to a combination of several factors. It is largely explained by the dynamism of household consumption, spurred on by the moderation of inflation and the interest rate cuts by the European Central Bank (ECB).

On the other hand, the continued recovery in employment, a booming tourism and services sector and a favourable investment context supported by European funds are the ingredients that are boosting an economy that had lagged after the last crises.

Although the good performance of these sectors has allowed GDP to remain buoyant, this has not been reflected in a significant improvement in household incomes. Moreover, the IMF points out that Spain’s inflation rate will average 2.8% this year, a rise in prices that is ‘more intense’ than expected in the eurozone, where there will be a rise of 2.4%.

 

Job insecurity and stunted growth in GDP per capita

Spanish GDP per capita continues to fall behind that of its EU partners. According to the latest Eurostat data, it has gone from 25,420 euros in 2019 to 25,620 euros this year, a growth of only 0.1%. Although per capita purchasing power in Spain has risen by 7% this year, to 16,449 euros, the difference on the European average is one percentage point less than the previous year, when it was 6%, as reflected in the GfK Purchasing Power 2023 report. In addition, Spain is among the countries that lose the most purchasing power concerning food prices.

As the newspaper El Economista points out, ‘the data that dismantles the economic miracle is GDP per capita, a somewhat more refined indicator that has barely grown in Spain in the last four years… and even in the last 15’. Speaking to the News, Judith Arnal, senior researcher at the Elcano Royal Institute and independent advisor to the Bank of Spain, explains that ‘Spain’s GDP has relied on population growth, public consumption and exports of services’ while in other countries ‘it focuses on investment and exports of goods.’

The other major obstacle preventing growth from translating into increased purchasing power is the chronic problem of low job quality in Spain. Although the unemployment rate has fallen, wages remain low compared to other European countries. Moreover, the high temporality in the Spanish labour market – 61.7% of young people in Spain have a temporary contract – prevents workers from enjoying economic stability that would guarantee consistent household incomes.

 

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