Spain's economic growth soars as the eurozone stagnates

Spain is on track to overtake the United States this year to become the world's fastest-growing major advanced economy, expanding more than three times faster than the eurozone as a whole.

Economists compiled by forecasters Consensus Economics expect this week's GDP figures to show Spain is on track to grow by 2.7% this year, driven by a combination of immigration, tourism, foreign investment and public spending. There is.

The IMF is more bullish, including Spain along with the G7 countries in its outlook for large industrialized economies. The fund last week said it expected U.S. growth to be 2.9%, slightly higher than the 2.8% forecast.

The eurozone's fourth-largest economy is leading the divergence that has been the region's most notable economic trend this year. Germany, the region's largest economy, and other rich northern countries such as the Netherlands are struggling to grow. Meanwhile, traditionally weak southern states such as Spain and Greece are doing well.

Spain's third-quarter GDP figures were released on Wednesday morning, just before figures for the entire region were released.

Opposition politicians and some economists in Spain argue that there is something wrong with the country's growth story, pointing out that GDP per capita is growing slower than the main GDP.

This is partly due to the addition of 700,000 working-age immigrants to the labor force over the past three years, according to the Savings Bank Foundation Funcas. They helped increase the total population from 47.4 million to nearly 49 million, but many work in low-skill, low-wage jobs.

At the same time, critics of the Socialist Party-led government argue that too many Spanish families are suffering from high living costs and that little is being done to alleviate the acute shortage of affordable housing. I am doing it.

Spain's headline growth rate is expected to slow to 2.1% next year, but its strength remains a boost for Prime Minister Pedro Sánchez, who wants to assert Spain's credibility and improve its international standing.

“We can say that Spain is living in a special period,” he said last week. “Our country is a huge success.”

Spain's economy has been slower to recover from the impact of COVID-19 than many of its peers, but it is now 5.7% larger than in 2019, compared with 4.2% for the eurozone as a whole.

Funkas estimates that increased government consumption, including pandemic-related aid and public sector employment, accounted for 59% of that growth.

“When growth depends on public spending that is unsustainable in a country with a high debt-to-GDP ratio, someone should be concerned,” said Juan Bravo, economics director for the opposition People's Party. According to the IMF, Spain's government debt is equivalent to 102% of GDP.

But investors are unfazed. In the government bond market, the spread between Spanish and German government bond yields – an indicator of how risky Spain is considered to be – is at its lowest level since January 2022.

Spain's 10-year bond yield is currently 2.98%, lower than France's. Richard McGuire, head of interest rate strategy at Rabobank, said this partly reflected France's budget deficit, expected to reach 6.1% this year, and Spain's “strong fundamental performance”.

Tourism, a mainstay of Spain's economy, partly explains why the country is growing faster than last year with a record 85 million visitors. However, Economy Minister Carlos Cuerpo emphasized that exports of non-tourism services are growing rapidly.

Cuerpo said last week that tourism is expected to generate 90 billion euros in Spain's balance of payments in 2024, while other services exports are expected to generate 100 billion euros. This includes activities ranging from banking to engineering services and IT consulting for international customers and universities hosting international students.

Spain has also been the world's sixth-largest destination for foreign direct investment projects since 2019, according to fDi Market, a Financial Times-owned database that tracks greenfield announcements. In the field of renewable energy, one of the country's strengths, the country secured 77 new projects last year, making it tied for first place in the world with the United States.

However, Raymond Torres, director of macroeconomic analysis at Funcas, noted that overall investment, as measured by gross fixed capital formation, has barely increased. The reason, he suggested, is that many Spanish companies have a darker view of the country and its divided politics than foreign companies.

“Globally speaking, Spain is not in a bad position,” Torres said. “But of course the Spanish investor, especially the SME, does not think about international comparisons. He reasons according to his own vision of things and perceives any political uncertainty more directly.”

Spain's unemployment rate remains high at 11.2%, but the country boasted a record 21.8 million jobs in the third quarter of this year. Funkas calculates that immigrants account for 40% of new jobs created in the past three years.

Adrian Prettejohn, an economist at Capital Economics, said the rise in immigration “ensures that the workforce is not as significant a constraint on production as it is in other parts of the eurozone,” allowing companies to constrain wage growth. He said that it is not only helping to increase consumer spending, but also boosting consumer spending. .

However, most immigrants work in sectors such as agriculture, services, and construction, where worker productivity is low.

Ignacio de la Torre, chief economist at investment bank Arcano, said Spain's dependence on immigration means that there is “quantity growth” due to job vacancies rather than quality growth. He said he meant it.

“High-quality growth means higher productivity, which will lead to higher GDP per capita and therefore higher living standards,” he said. “Germans are more productive and earn more than Spaniards, so they can live a better life and work fewer hours.”

Additional reporting by Carmen Muela in Madrid