The Bank of Spain now expects the Spanish economy to grow in 2024 more than it predicted in December, and it also foresees inflation averaging below that earlier estimate. In its new projections published on Tuesday, the institution raises by three tenths its growth forecast for 2024 to 1.9 percent, coming close to the government’s 2 percent target, and trims by six tenths the average inflation forecast for 2024 to 2.7 percent.
Compared with the December forecast, the bank has upgraded 2024 growth to 1.9 percent, moving in the opposite direction of the European Central Bank which shaved two-tenths off its euro-area outlook to 0.6 percent.
In addition, the Bank of Spain keeps unchanged its projections for 2025 at 1.9 percent and for 2026 at 1.7 percent. It notes that this depends on the government delivering a spending adjustment plan to meet the new fiscal rules, which, it says, will likely restrain growth in the coming years. Geopolitical tensions, including wars in Ukraine and Gaza and tensions in the Red Sea, add downside risks to the more optimistic scenario described this Tuesday by the bank.
“Doubts persist about the pace of implementation of European funds.”
Menos inflación y más empleo
In its new projections, the Bank of Spain improves its inflation outlook for each of the three years: 2.7 percent in 2024, 1.9 percent in 2025, and 1.7 percent in 2026. It estimates that extending some food, electricity, and gas relief measures in 2024 will reduce the 2024 inflation forecast by three tenths from the December estimate of 3.3 percent to the current 2.7 percent.
The research service also raises employment prospects, now forecasting a 1.8 percent rise in hours worked, half a point above the December estimate, and a lower unemployment rate: projected to fall from an average 12.1 percent in 2023 to 11.6 percent in 2024, though by 2026 it would still be above 11 percent of the active population (roughly 11.3%).
Deficit del 3,5% en 2024
Public accounts outlook, however, worsens slightly. The Bank of Spain expects the deficit of all public administrations to close 2023 at 3.8 percent of GDP, aligning with the government’s estimate, but projects a 3.5 percent deficit in 2024, a half-point above the government’s target and the limit that would trigger excessive deficit procedures under European rules.
The bank warns that resuming European fiscal rules, suspended since the pandemic, introduces a notable risk to its central projection. Complying with these rules would require a medium-term consolidation plan broader than what the bank has assumed, and while the exact impact depends on design, the agency notes that it would probably slow activity along the projection horizon. The Spanish fiscal watchdog Airef has estimated a structural adjustment of about 10 billion euros annually to meet the rules.
Factores a favor y en contra
Right now, the main driver behind the optimistic 2024 growth forecast is the unexpected acceleration of Spain’s economy in late 2023. Falling energy prices, the fading effect of previous monetary tightening, a forecast of lower interest rates than previously anticipated, a gradual European and global economic reawakening, inflation easing, and a stronger labor market are additional factors supporting growth.
On the downside, there could be a waning of some tailwinds that boosted recent growth, ongoing geopolitical tensions, and slower investment than December’s forecast. The bank now sees gross fixed capital formation at only 0.4 percent in 2024, down from 2.7 percent previously anticipated.
De menos, a más
The bank calculates that the quarterly pace of GDP growth slowed slightly in the first quarter of the current year, from 0.6 percent to 0.4 percent, but beyond the first quarter it expects relatively stable growth rates that converge toward the economy’s potential capacity across the projection period.
In particular, it expects the deployment of European funds to gain traction in 2024 and 2025, with the maximum impact on growth materializing in 2025 and 2026. Still, doubts remain about the speed of project execution under the Next Generation EU program and its actual impact on activity.
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