Following substantial growth last year, Spain’s economy is projected to slow in the current year but should keep expanding at about 2 percent. The European Commission’s latest spring forecast, released this Monday, estimates growth of 1.9 percent for 2023 and about 2 percent for 2024. These figures sit below the government’s 2023-2026 stabilization program projections of 2.1 percent for 2023 and 2.4 percent for 2024, yet they remain well above the earlier winter projections of 1.4 percent for this year and 2 percent for the following year. Even with these revisions, the Community’s outlook suggests Spain will struggle to reduce its public deficit. The Commission expects the deficit to be about 4.1 percent in 2023 and 3.3 percent in 2024, driven by slower income growth and a forecast that formal government projections underestimate the path of budgetary tightening for the near term.
Brussels paints a cautiously optimistic picture. Spain is anticipated to outpace the euro area average, which is seen at 1.1 percent in 2023 and 1.6 percent in 2024, supported by a resilient labor market, the impact of recovery funds, lower energy costs, and a rebound in tourism. In the first quarter of 2023, Spanish GDP rose by about 0.5 percent, aided by tourism and a stronger-than-expected income transfer effect. For the year as a whole, growth is projected to reach around 1.9 percent, aided by improving domestic demand. The Commission also expects household consumption to recover, buoyed by a recovering labor market and higher real incomes for retirees and workers earning the minimum wage.
Next Generation Recovery funds are expected to continue supporting investments, sustaining the expansion. Low import prices and fewer supply chain bottlenecks should help the investment goods sector rebound, while ongoing mobilization of recovery and resilience plan funds is likely to support investment, especially in non-residential construction. The Commission notes the sharp declines in energy costs and a faster rebalancing of supply chains as factors strengthening competitiveness and aiding a tourism rebound to pre pandemic levels, with positive spillovers for the external sector.
These developments would narrow the gap between the current performance and the pre pandemic level in the latter part of the year. Among downside risks, the Commission flags tighter financial conditions impacting households and businesses. On the household front, while most new mortgage lending is at fixed rates, a sizable share of existing debt remains at variable rates, which could weigh on disposable income if rates rise further.
Regarding the labor market, Brussels highlights a favorable trend in 2022 with steady job creation and a reduction in temporary contracts in the private sector. Unemployment dropped to around 12.9 percent in 2022, with forecasts of about 12.7 percent in 2023 and 12.4 percent in 2024. The analysis suggests that wage growth will pick up in 2023 but still run slightly below expected inflation for the year, shaping the inflation dynamics for the near term.
The new forecasts also indicate a gradual easing of inflation, aided by moderating energy prices. The Commission notes that most government measures implemented to support the economy through 2023 will extend beyond their original end date and that additional steps, including a reduction in VAT on certain foods, will contribute to a gradual fall in overall inflation, projected to reach about 4 percent in 2023 and continue easing toward 2.7 percent in 2024. Core inflation may remain elevated during the forecast period, with upside risks from faster wage growth and ongoing inflation-related policies, including the minimum wage adjustment.
However, concerns remain about the public deficit, which Brussels expects to improve only gradually. While revenue remains robust, a slowdown in income growth is anticipated. In 2023, the deficit is projected at about 4.1 percent of GDP, with a further reduction to 3.3 percent in 2024 as temporary emergency measures adopted during the COVID-19 period are phased out. Public debt is expected to ease slowly, moving toward roughly 111.5 percent of GDP in 2023 and about 110.3 percent in 2024, signaling a cautious but continuing path toward fiscal normalization.