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by Nicholas LarsenInternational Banker
ohFitch Solutions on May 1st revised up its 2024 forecast for the Spanish economy, now seeing gross domestic product (GDP) expand by 2.2% in 2024, up from the previous forecast of 1.5%. This follows a healthy growth rate of 2.5% that the southern European country recorded in 2023. Moreover, a number of key factors underpinning this revised, brighter outlook, including strengthening domestic consumption, a thriving tourism sector and a buoyant labor market, make the Spanish economy stand out as one of the few bright spots in a gloomy picture for the eurozone in 2024.
Fitch noted that Spain's performance was well above expectations, with real GDP growth in the first quarter (Q1) of 2024 forecast at 0.7% quarter-on-quarter and 2.4% year-on-year. BloombergThis was above the consensus forecast of many other major institutions and central banks, including the Bank of Spain, the OECD and the European Commission, which showed a quarterly growth of just 0.4%. This stellar quarter-on-quarter growth in the first quarter was mainly due to the strength of the international sector, which accounted for 0.5% growth, with tourism performing particularly well, and household consumption, which grew by 0.3%. Meanwhile, investment recovered by 2.6% in the first quarter after suffering two consecutive quarters of contraction.
Spain's strong first-quarter performance is especially commendable given the longer-term difficulties of many other euro area countries, which will continue to be severely affected in 2024, with persistently above-target inflation and interest rates remaining high for an extended period of time. Indeed, Spain's Minister of Economy and Trade, Carlos Cuerpo Caballero, stressed that the strong growth this quarter confirms that Spain is experiencing “differentiated” growth compared to other euro area economies, “which is particularly important in the uncertain international environment we are experiencing.” Minister Cuerpo added that this growth “puts the country in an excellent position to achieve the Government's 2% growth target for 2024.”
In its latest assessment, published on May 1, Fitch decisively upgraded its outlook for the Spanish economy compared to its previous quarterly update, attributing the improvement mainly to projecting private consumption to be stronger this year than previously expected. “Domestic demand remained stable, contributing 0.7 percentage points (pp) to growth in the first quarter of 2024, while the external sector contributed 0.5pp despite export growth slowing slightly in the quarter from 2.8% to 2.4%,” Fitch's BMI Industry Research (Fitch Solutions) noted. “Looking forward, we expect private consumption to expand further in 2024, driven by employment and nominal wage growth in 2023 and easing inflationary pressures.”
Strong growth in housing demand has also been a key pillar of Spain's growth in recent quarters, with ING highlighting how this has helped strengthen residential investment. “Strong growth in housing demand continues to outpace growth in housing supply,” ING analysts wrote in late March. “Finally, government spending also increased and the net trade balance improved. Breaking it down by sector, interest rate-sensitive sectors such as manufacturing and construction unexpectedly grew strongly in the fourth quarter.”
Indeed, Fitch highlighted annualized industrial production as the main driver of growth on the supply side in Spain, expanding modestly in January and February after bottoming out in December 2023. “The manufacturing Purchasing Managers' Index (PMI) entered expansionary territory in February 2024, while the composite index remained well above the 50.0 threshold (separating contraction from expansion) at 55.3 points in March 2024 (up from 53.9 points in February),” the ratings agency added in its May 1 assessment. “The services sector, which remains the main driver of Spain's economic growth in 2023, remains relatively robust. The Services PMI continues to rise in expansionary territory, at 56.1 points in March 2023.”
Meanwhile, Banco Bilbao Vizcaya Argentaria (BBVA) recently identified Spain's strong export sector as a key factor in the country's favorable performance. for Elsewhere in the euro area, particularly in the services sector, tourism continues to show surprising strength: foreign card spending data shows that non-resident consumption growth rose 5% in real terms quarter-on-quarter at the start of 2010. [the] “Service exports have declined this year compared to last year,” BBVA Research explained in a press article dated March 11. “Furthermore, other services exports (7.6% of GDP, 5.0%), which account for a larger weight than foreign tourism, such as consulting, information technology and communications, and financial services, are on the rise (0.5% in the first quarter of 2024).”
BBVA also noted that Spanish household spending has become increasingly services-oriented in recent years, which has proven crucial to the country's robust economic performance this year. The Spanish bank noted that of the five most weighted elements in Spanish households' consumption basket since 2019, four fall into the services sector, including catering, outpatient services, and finance and social security. Meanwhile, the largest cuts in spending have been identified for goods such as clothing, food, vehicles and footwear. “This reorientation of spending has particularly benefited the Spanish economy, which is highly concentrated in service provision,” BBVA Research added.
Still, downside risks to Spain's outlook remain. The biggest is probably political, with Pedro Sánchez of the Socialist Workers' Party (PSOE), who was re-elected prime minister in November, four months after July's parliamentary elections, heading a decidedly fragmented coalition government with the far-left Smar party. This coalition has been reaching out to regionalist parties to garner votes, and has the support of ERC and Junts in Catalonia, PNV and EH Vildu in the Basque Country, BNG in Galicia, and the Canarian Union in the Canary Islands. So with so many parties to appease, passing legislation could be decidedly tricky.
Indeed, while coalition talks late last year postponed approval of the 2024 budget, and after Catalonia called early elections that could have further eroded Sánchez's support in parliament, the government again decided in March not to send a draft budget to the Spanish Parliament (Cortes Generales) and instead to carry forward the 2023 budget to the end of the year. Such moves underscore the political impasse in the Spanish government and could have significant negative implications for Spain's economic outlook in the coming months.
On March 15, S&P Global Ratings maintained Spain's credit rating at “A/A-1,” but warned that the rating could be lowered in the future if the economy's external position and the government's fiscal position were to deteriorate unexpectedly. The most likely causes would be a “significant and negative budget delay” and an “unexpected deterioration in Spain's current account balance, a slowdown in external debt reduction, or an increase in external liquidity risks.” However, Spain's rating could be upgraded if “the country's external position strengthens, government debt-to-GDP ratio declines at a faster pace than currently expected, and Spain's commercial banking system remains strong and largely domestically funded (net).” S&P therefore noted that the current rating affirmation reflects a balance of competing factors in its assessment of Spain's creditworthiness.
“The political fragmentation could impede the implementation of reforms, including those related to the National Reform Plan necessary for disbursing remaining Recovery and Resilience Facility (RRF) grants, clouding the outlook for economic growth and delaying structural fiscal consolidation,” S&P said in its March 15 rating assessment of Spain. “At the same time, Spain's reduction in gross government debt has been relatively slow despite robust nominal growth. Despite these weaknesses, the Spanish economy has remained strong in the face of a series of shocks and steady external debt reduction. The ratings are also supported by Spain's large, diversified economy and its institutional strength as a euro area member.”
However, Spain's political fragility was subsequently further exposed when Prime Minister Sánchez was suspended from office from April 24 to April 29 following corruption allegations against his wife. Although the Prime Minister confirmed that he would continue in his role, helping to bolster confidence in Spanish governance for the time being, these events highlight the potentially fragile and divided nature of Spain's current political environment.
“The prime minister's resignation leaves Spain without a successor, increasing policy uncertainty and likely leading to snap elections as parties struggle to assemble a coherent governing coalition. The prime minister's decision to stay on would ensure policy continuity and avoid another general election within a year,” Fitch said on April 29. “However, we note that Sánchez still heads a fragile minority government that has taken four months to form and has only managed to pass limited policy, suggesting that any certainty brought by this event will be short-lived and the government will continue to struggle to shape policy.”
Fitch also cited tough financial conditions and weakening net trade as constraints for the Spanish economy in 2024. “The Spanish economy returned to pre-pandemic size in the third quarter of 2022, but still-tough financial conditions and a weak external demand backdrop from the euro area and possibly the US will weigh on the Spanish economy,” Fitch said. “Even with the upward revision, we still see Spain's GDP growth remaining below trend until at least the end of 2025, and we forecast the Spanish economy to grow by 2.0% in 2025.”
