The Spanish economy has become the engine of growth in the euro zone. Spain’s overall GDP is growing at a rate almost three times that of the euro zone, while generating jobs and curbing inflation. All of the above being true and remarkable, there is a fact or indicator that demonstrates this miracle or achievement. It is true that overall GDP is a good economic indicator, but it has a weak point: it says almost nothing about the well-being of citizens. For example, India or Pakistan generally have very high GDP growth, but this sometimes does not imply even a minimal improvement in the quality of life of their citizens. Something similar is happening in Spain. The factors behind this strong GDP growth have little to do with improving the lives of Spanish citizens. In this way, the data that dismantles the miracle is GDP per capita, a slightly more refined indicator which has hardly increased in Spain over the last four years… and even over the last 15.
Overall GDP data shows that Spain and Italy are doing very well since covid, at least compared to other major eurozone economies. Spain’s overall GDP was 4.7% higher in both cases compared to the pre-pandemic level of the second quarter of 2024, everything suggests that Spain will be left alone, since Italy will no longer be able to maintain this pace. But focusing the analysis on global or aggregate GDP would amount to choosing ‘big donkey, walk or don’t walk’. In terms of prosperity, perhaps a smaller, but faster and more prosperous donkey compensates more.
GDP growth can come from different sources or drivers, and Spain is mortgaging its future for temporary growth now. For example, growth of the working age population and its integration into the labor market automatically generates higher product or GDP. Indeed, a greater number of people are working and producing. However, when it comes to distributing this production among the total population, the GDP per capita remains the same or may even be lower if productivity shows negative growth.
Another option is that in an economy in which the population remains constant, the employment rate increases without affecting productivity. This scenario is a bit more positive, as it generally leads to an increase in GDP per capita and prosperity. However, the ideal scenario is one that increases both the employment rate (a greater percentage of the population works) and productivity. This “magic” combination generates large increases in GDP per capita and therefore productivity, but it also requires virtually stagnant investment.
Thus, the Spanish productive model continues to be anchored in the massive incorporation of human capital, mainly foreign, and does not improve the capacity for productivity growth in the years to come. Projections from the Ministry of the Economy included in the budget plan estimate this: potential GDP will gradually decline and be halved (1%) in a decade.
Intensive or extensive growth
What happened in Spain during these years of strong growth in overall GDP? Judith Arnal, senior researcher at the Royal Elcano Institute and independent director of the Bank of Spain, explains it perfectly by making a comparison between the growth of Italy and that of Spain over the last four years: “Spain’s GDP was supported by the increase in population, public consumption and exports of services, while Italy focuses on investments and exports of goods. On the other hand, the strong differences in demographic growth, with an increase of 3.6% for Spain between the start of 2019 and 2024 and a decrease of 1.4% for Italy, also explain that if GDP per Italy’s inhabitant at the end of 2023 was 4.7% higher. “Per capita income rose from 25,420 euros in 2019 to 25,620 today, according to the latest Eurostat data. Which is more serious , looking back, is that GDP per capita is falling today, only 4% more than in 2007.
The data on GDP per capita growth since 2019 is revealing. Spain did worse than Italy. Arnal explains that “the real GDP per capita ended the year 2023 in Italy 4.7% above the year 2019, compared to a modest 0.1% in Spain. For its part, in Germany, the real GDP per capita in “2023 was still 0.9% below 2019.” The expert adds that this strong difference between the evolution of global GDP and the figures for GDP per capita is logically explained by the denominator, it is that is to say by the different evolution of the population.
“Spain is the country in the Eurozone with the fastest growing population (3.6%, going from 46.9 to 48.6 million inhabitants). At the opposite extreme is Italy, with its population falling by 1.4%, from 59.8 to 58.9 million inhabitants. This suggests that GDP growth would be more intensive in Italy and more widespread in Spain, that is, more based on the increase in population in the Spanish case,” explains Arnal.
In other words, Spain’s economic growth is more extensive than that of Italy, which is more intensive. Furthermore, another difference lies in the strong expansion of public consumption in Spain. In the first quarter of 2024, public consumption was 11.8% higher than in the last quarter of 2019 in Spain, followed by Germany, with an increase of 7.9%. At the opposite extreme is Italy, with growth in public consumption between these two periods of 5.1%. “Public consumption has increased significantly over these years in response to the pandemic first and the inflationary crisis second, but once tensions appear to have eased, this variable should be monitored to avoid structural increases of public consumption”, explains the researcher.
On the other hand, this expert emphasizes that household consumption is slightly higher than pre-pandemic levels in Spain, good news in a context where prices and lower interest rates will relieve families. On the contrary, investment (gross fixed capital formation or GFCF), essential to produce more in the future, is still very far away.
“In Italy, GFCF was 30.7% higher in the last quarter of 2019 than in the first quarter of 2024 (although this data is tricky due to the government superbonus). The other country with higher GFCF levels in start of the pandemic is France, but very far from Italy, with an increase of 1.7%. And Spain and Germany both reported GFCF levels of 2.2% and 3.9% in the first quarter of 2024.respectively, below the last quarter of 2019. These are striking figures, especially in light of the funds made available under the Recovery and Resilience Mechanism (RRM), which call for the acceleration of the channeling of these public resources towards the entire economy. This could suggest that Italy is quicker to channel MRR funds and highlights the importance of using these resources as a means of stimulating investment,” said the Spanish economist.
One of Spain’s “musts” is investment per employee, which in economic terms is defined as the stock of fixed capital per employee and which measures the value of the fixed assets that each worker must produce: machines, spaces, software… any tool or resource capable of generating added value. This indicator closed the year 2023 seven points below the pre-pandemic level, and the Bank of Spain also echoed this. “From a macroeconomic perspective, there is broad consensus that a lower stock of human capital reduces growth,” the supervisor explained in his annual report. “This impact would not only come from the direct effect of the level of education on individual productivity, but would also materialize through other channels such as the complementarity of human capital with investment in physical or technological capital.”
Taking Eurostat data at purchasing power parity (PPP), labor productivity per Spanish employee is 74,930 euros, while the value of fixed capital per employee amounts to 285,800 euros – a figure complex to extract with current statistical bases. Capital productivity reflects that the Spanish labor market is capable of producing 0.26 euros for each euro invested. in fixed assets. In other words, we need around four euros to produce one.
What differentiates us from Europe? The eurozone as a whole produces 81,700 euros with a fixed asset value of 275,900 euros. This comparison means that the Eurozone countries produce more than Spain with less: for each euro invested, they produce 0.30 euros. Less investment, knowing that a good part of the jobs created occur in sectors where human capital is more necessary than physical capital, and also less productive capacity.
It therefore seems obvious that Spain’s strong economic growth is largely due to the drastic increase in population, product of the arrival of foreigners, public consumption and exports of services (tourism in the lead). ). This growth, which was useful in getting out of the slump caused by the Covid pandemic, may not be sustainable. This is why Arnal calls for measures to increase productivity and achieve greater growth in GDP per capita, growth that is more intensive than extensive… a donkey that walks better and faster, even if it is not as big.
