The Spanish economy will grow this year more than expected. Last week, it was BBVA Research that revised upwards its previous forecasts to place the new ones at 2.1%. And today the projections of a heavyweight arrive. The Bank of Spain also joins the correction with three tenths upwards, and sets the increase in GDP in 2024 at 1.9%. In this way, it is close to the percentage that the Government has calculated, 2%, which a few months ago few considered credible. A dynamism of the Spanish economy that contrasts with the weakness of the euro zone, which will grow only 0.6% this year.
There are three main reasons that justify the upward correction of the Bank of Spain. First, due to the drag effect of the better-than-expected growth of the last quarter of last year. The end of the year surprised everyone with an acceleration in activity when the opposite, a slowdown, had been predicted. Secondly, lower energy prices will help, with the significant drop in electricity that we are experiencing in February and so far in March; and finally due to the more gradual than anticipated withdrawal effect of the measures that form the anti-inflation shield.
Added to this are interest rates that are expected to be reduced, which will help boost activity. Growth would still be higher if it were not for the lack of dynamism of investment and the prominence that public consumption has had in recent months and which will have to moderate in the near future to meet debt reduction objectives. “We do not contemplate that the level of public consumption will be maintained in 2024… It would be incompatible with the recommendation of the European Commission,” said Ángel Gavilán, general director of Economy and Statistics of the Bank of Spain.
In any case, the Bank of Spain predicts that this first quarter of the year growth will moderate slightly, with 0.4%, which would be two tenths less than the increase in GDP in the last three months of the previous year. From January to March, private consumption maintains a growth rate similar to the previous quarter, while investment continues to be weak and public consumption, previously very dynamic, loses strength. Relatively stable increases in GDP are expected after the first quarter. The gradual softening of monetary policy, and the greater deployment of European funds both this year and especially in 2025 and 2026, will play in their favor.
On the other hand, the labor market remains strong, with greater than expected dynamism and which will continue throughout the year. As in previous quarters, this job creation is largely driven by foreign workers who in February saw their affiliation increase by 8.3% year-on-year due to a 1.7% increase in the affiliation of Spaniards. This dynamism of foreign employment has helped to correct the lack of labor in sectors such as hospitality and construction, where this problem is most pressing according to the survey that the Bank of Spain carries out on companies (EBAE).
However, among these positive data, the Bank of Spain issues a warning that this year it may be necessary to apply compensatory measures to adjust spending, given that the partial extension of aid, such as the reduction in VAT on food, the reductions energy taxes or the subsidy for passenger transport, will mean a budgetary cost of 0.6 points of GDP this year. It is a very lower budgetary cost, less than half of what these measures had in the last two years, but to comply with European recommendations, an extra fiscal effort may be necessary.
Regarding inflation, the Bank of Spain is revising its forecast for this year downwards, leaving it at 2.7%, which is six tenths less than its December calculation. The reasons for this moderation in prices come from cheaper energy and the partial extension of anti-inflation measures. The moderation in prices would be accentuated in 2025 (1.9%) and 2026 (1.7%). Also the underlying one, which does not take into account energy or fresh food, will reduce to 2.2% in 2024.
The Bank of Spain draws a growth path of 1.9% for this year and the next and 1.6% for 2026. The main risk for these projections is the reactivation of European fiscal rules. Yesterday, the Eurogroup already warned all countries that in 2025, which is when these rules will be back in force, “a slightly contractionary fiscal position” will be needed, and today the Bank of Spain points out that in this 2024-26 horizon A medium-term fiscal consolidation plan will have to be applied, which will predictably lead to a slowdown in economic activity.
