Spain’s economy is forecast to grow at a slower pace in 2024, with expansion around 1.6 percent, a touch under earlier projections. New data from the Bank of Spain point to inflation near 3.3 percent. The quarterly outlook released recently shows 2024 activity at about 1.6 percent, falling short of the government’s 4 percent target.
The central bank now expects the average inflation rate to stay near 3.3 percent for 2024, one percentage point lower than the previous outlook in the autumn. This adjustment reflects a easing of global energy prices and the government’s decision to extend the VAT cut on food through 2024 (to midyear) and public transport bonuses through December.
The forecast also assumes that other relief measures, such as VAT reductions on electricity and gas, will end on 31 December and will not be extended in 2024. If the government signals a different approach next week, the average inflation forecast for 2024 could fall below the 3.3 percent baseline.
Looking ahead, the inflation moderation path is expected to continue gradually across the coming quarters. The baseline envisions a decline from about 3.4 percent in 2023 to roughly 3.3 percent in 2024, with a further dip in 2025 and a return to roughly 2 percent in 2026, with occasional readings near 1.9 percent.
Recovery in 2025
On the growth side, updated projections show GDP expanding from 2.4 percent in 2023 to around 1.6 percent in 2024, a touch below the autumn estimate. The revision mainly reflects softer execution of European funds and weaker household spending. Tighter monetary policy and higher interest rates are expected to weigh most on economic activity in 2024.
As a result, the envisioned path features a gradual cooldown from 2023 into 2024, followed by a modest rebound in 2025 and 2026, with projected rates near 1.9 percent and 1.7 percent respectively.
Compared with the euro area average, the Bank’s scenarios suggest Spain could outperform the euro zone in 2023 and approach 1.6 percent growth in 2024, ahead of the European Central Bank’s projected 1.5 percent for the euro area in 2025 and 2026.
Fourth quarter of 2023
The Bank estimates Spain’s economy grew by about 0.3 percent in the fourth quarter of 2023, a pace close to the third quarter as growth softened. Private consumption shows a moderation in late 2023, consistent with the broader demand slowdown.
The report highlights continued restraint in consumer spending, influenced by ongoing economic tensions and the pace of credit conditions. In the ECB’s consumer expectations survey, households indicate limited willingness to make major purchases in the near term, reinforcing the tempered consumption outlook.
Pressure from foreign workers
The Bank notes that employment growth should stabilize in the final quarter of the year, with foreign workers contributing again to the expansion. In the prior year, these workers accounted for just over 40 percent of total employment gains, rising from about 11 percent at the end of 2019 to 12.8 percent. The unemployment rate is projected to ease from around 12.9 percent in 2022 to about 12.1 percent in 2023 and to continue a slow descent from 2024 through 2026, hovering near 11 percent of the labor force. Unit labor costs are rising, driven by stronger wage growth on new contracts, even as productivity remains weak. The Bank cautions that non-wage components and productivity gaps could push unit labor costs higher than in other euro-area economies, affecting competitiveness and price dynamics for Spanish firms.
Public deficit will be 3.4% in 2024
On the public deficit, the Bank projects a shortfall of about 3.4 percent of GDP in 2024, up from around 3.8 percent in 2023, which is slightly above official targets. This stance would keep Spain within the framework of an excessive deficit procedure if not corrected. The agency notes that tax revenue growth, especially from late 2022 onward, has slowed compared with the macroeconomic and fiscal measures in place.
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