The Spanish economy is going through a pleasant period, at least as far as “macro” indicators are concerned. This Monday, the Fitch rating agency published a report which highlights all the positive points which lead the national economy to surpass most European countries in terms of growth. If we could travel back in time and show this report to the economists of 2006-2007, no one would believe that Spain is the protagonist country of this document. The national economy is experiencing strong growth, generating numerous jobs, while inflation is under control, public debt is gradually being reduced, the competitiveness of the productive sector is maintained, the current account surplus and Exports are growing faster than those of Germany, Italy or France. Furthermore, in terms of GDP, Spain already exports much more than France or Italy. This Spain is different.
During the growth cycle that began with the end of the 1990s crisis, Spain experienced very powerful economic growth. However, this increase in GDP hid growing imbalances (the largest current account deficit in the world, Spain was widening under the effect of credit from abroad) which would eventually lead the national economy to the greatest crisis known for decades: a financial crisis spiced up by a strong recession and the bursting of a real estate bubble. Everything that was achieved in over a decade was gone in a few years. Today, the Spanish economy looks different. The construction and real estate sector has a smaller weight, the economy is a net creditor (Spain finances the rest of the world) while exports of goods and services are increasingly important. At the same time, the labor market generates hundreds of thousands of jobs each year.
The rating agency Fitch Ratings, however, revised upwards potential GDP forecast of Spain at an average of 2% over the period 2024-2028 thanks to supply-side factors, such as the fall in structural unemployment and job creation, but also to productivity. According to the report released this Monday, the country will grow around 3% this year and will continue to exceed 2% between 2025 and 2026, although a subsequent slowdown will average 2% until 2028.
The agency highlights the good moment of the Spanish foreign sector: “In terms of demand, exports of services (including tourist and non-tourist services) have contributed significantly. Real exports of goods and services have increased by 11% since 2019, more than in Germany, France or Italy.. Public consumption – largely in the form of increased employment at different levels of government – has also been a factor, increasing well above the euro area average since 2022,” the report highlights.
Spanish exports already have a weight in GDP of around 39%far surpassing France and Italy (around 33%) and moving ever closer to Germany, where exports of goods and services represent 43% of GDP. Fitch also highlighted that this improvement was accompanied by “rich” dynamism in the labor market. “Job creation could remain higher than in the eurozone for some time due to strong labor force growth and continued decline in unemployment. The structural unemployment rate is almost certainly below the 11 .2% current”, summarizes the document.
The working age population is increasing
The increase in the working age population was significant, since only the 2022 net migration was higher than that of the entire 2010 decade. This circumstance would have made it possible to “remedy” the aging of the indigenous population and to “moderate” its growth. ” in the participation rate. In the future, the accelerated growth of this population group will continue, although it will attenuate.
For its part, Fitch recalled that Spanish GDP per capita remains below the European average and that it is converging there “slowly”. However, he predicts that productivity will rebound despite past slow gains, as the factors driving growth change. HASYes, it is expected that private investment in Spain will gain importance under the protection of a falling interest rate environment. and for the windfall brought by the execution of projects financed by European funds.
“Labour supply, job creation and increased competitiveness have been fundamental to Spain’s strong growth. These supply factors should, barring disruptions, drive growth to above 2 % until 2026,” explained Charles Seville, analyst at Fitch.
Spain would have benefited in those years from greater competitiveness after unit labor costs fell relative to the eurozone over the past ten years. Then, exports of goods and services would have increased, which would have resulted in a current account surplus. The Spanish industry was said to have been “resilient”, according to Fitch, thanks to the fact that electricity prices have fallen compared to other markets since the 2022 energy crisis due to greater deployment of renewable energy.
The weak point of the economy
However, the report also highlights the weak point of the Spanish economy: productivity. Long-term labor productivity performance in Spain has been acceptable, with growth of 1.5% per year between 1978 and 2023. But this data is misleading, since almost all of the growth occurred between 1978 and 2000. However, more recently, productivity growth is lagging of most other major economies, averaging just 0.1% between 2014 and 2023.
Furthermore, since 2019, investment has been lagging and job creation is very strong, leading to a negative contribution from capital deepening (capital per worker). “Stronger investment and steadier employment growth will lead to capital deepening. We believe that increases in total factor productivity (TFP, which typically explains the bulk of increases in labor productivity) provide “improved, although smaller, contribution to potential growth.” Investments and reforms associated with Spain’s resilience and recovery program are expected to have a positive impact, although it is difficult to estimate. , the report says.
