Economic Update: Spain’s Q2 Growth and Inflation Trajectory

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Bigger signals than expected surfaced in Spain’s economy as the second quarter closed. The nation grew by 1.1 percent in Q2, a solid step forward despite the ongoing war in Ukraine and persistent inflation. For the year, growth hovered around 6.3 percent when comparing this year to the same period last year, with a similar pace expected on an annual basis. The National Institute of Statistics (INE) released the quarterly accounts showing the rate of expansion rose nearly one percentage point from the first quarter, underscoring a robust upturn in domestic demand. When compared with late 2021, the year-on-year trajectory likewise remained firmly positive, reflecting a 5.5 percent rise against a 2.2 percent quarterly change then.

The second quarter arrived amid the continuing Ukraine conflict and renewed inflation pressures. INE’s Friday data show domestic demand powering the rebound, with a clear revival in household consumption moving from contraction to 3.2 percent growth. Foreign demand contributed 2.6 percentage points to total growth, aided by a three-tenths improvement from the prior quarter.

Inflation rose to 10.8% in July, peak in 38 years

These results look more favorable than some expectations from the Bank of Spain’s research service. Tourism, after the pandemic, showed signs of recovery as international arrivals in May reached 88 percent of May 2019 levels, even with sector weaknesses still present.

According to the INE data, the economy displayed resilience with notable momentum in the lodging and hospitality segment, supported by social security membership trends. The INE reported an rise of 867,000 full-time equivalent jobs over the past year, a 4.9 percent increase. Hours worked climbed by 3.7 percent, just slightly below the pace seen in early 2022 by about 3.8 percentage points.

Economy authorities emphasized that the strength seen in the economy sits in a context shaped by global uncertainties from the war and its spillover effects. They pointed to the Recovery Plan that sought to cushion inflationary pressures and preserve household incomes and the broader productive fabric while maintaining investment momentum.

Still, expectations diverged. Some forecasters, such as the Bank of Spain’s research service, projected a smaller quarterly uptick of around 0.4 percent, highlighting the mixed signals surrounding the outlook.

Previously, the slow pace in activity during the preceding quarter was partly driven by a decline in household consumption. From January to March, consumption fell by 3.7 percent compared with a 1.5 percent increase in the prior quarter, a shift driven by higher price levels that reduced purchasing power for households. The inflationary backdrop was a key factor in this weakening, even as overall price dynamics remained a focal point for policy discussions.

Looking back at 2020, during the onset of the pandemic, there was a sharp quarterly rebound of 17.7 percent in the April–June period, followed by subsequent improvements, illustrating the economy’s capacity to rebound from shocks and adapt to changing conditions.

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