The Spanish economy confirmed in 2023 our expectations of a GDP. growth of 2.5%, well above the growth in the Eurozone. This strong performance continued in the first months of this year, mainly because the reasons behind the outstanding growth in 2023 are still present. However, they will be slowly fading out throughout 2024 and 2025. The Spanish economy has still a gap to fill from the pandemic. Contraction in 2020 was larger than in other advanced economies, and although the recovery was strong, it still lags other European economies in terms of GDP per capita and private consumption. This gap will continue to be filled in the next quarters, but at a slower pace than in the last years.
Exports, especially of services and public consumption were the main drivers of aggregate demand in 2023. For 2024 and 2025 we expect a strong (although declining) net external demand fostered by touristic and non-touristic services, and a greater role for private consumption once real salaries continue to recover. Public consumption should grow at a lower rate as the enforcement of European fiscal rules will impose additional constraints on public expenditure. Monetary conditions, as in the rest of the Eurozone, will start to ease but at a more moderate rhythm than initially foreseen.
On the supply side the level of public and private investment is still relatively low compared to 2019 and productivity growth has been very limited. These factors combined with the reduced number of structural reforms, that have been approved by a very fragmented Parliament, make that growth of potential output rely nearly exclusively on the reduction of structural unemployment due to economic growth.
Considering all the of the above in the demand and supply side, we expect a relatively strong growth for 2024 (above 2%) that over the next years will gradually converge towards potential GDP growth.
Regarding prices, Spanish inflation is very sensitive to oil price and its evolution mirrors the changes in energy prices. Until the last quarter of 2023, Spanish prices grew below or at a similar rate than the Eurozone.
However, since the end of last year, Spanish prices have increased faster than in its partners. This is due to a more horizontal movement of energy prices and the stickiness of food and services inflation. High external demand for services and a tightening labor market will continue to add resistance to the inflation of services. Our forecast is that headline inflation will remain quite stable throughout 2024, with just a marginal reduction in the annual average compared to 2023 and a more notable decline in 2025.
Unemployment will continue to decrease as economic growth will be relatively strong in 2024 and 2025, but the sluggish growth in productivity and the gradual increase in real wages will moderate the unemployment reduction.
In conclusion, Spain will outgrow its Eurozone partners in 2024 and 2025, but the growth differential is expected to narrow. Inflation will remain higher, reversing what happened during the pandemic and in 2023, but this will not challenge in the short run the strength of external demand.
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