Spain’s economy shows stronger momentum than previously expected in the first half. The Bank of Spain aims to revise its 2024 growth outlook from March’s 1.6% to around 2%, compared with the government’s 2.1% forecast. The latest data indicate activity picked up in the first quarter, and the recent revision of the historical index suggests 2024 GDP could exceed initial estimates by about 1.6%, according to Pablo Hernández de Cos, governor of the Bank of Spain, in the organization’s Annual Report released this week.
In the report’s introductory section, Hernández de Cos welcomes the salary agreement between employers and unions through 2025 and notes that pension reform will be put in place by 2025, following Bank of America calculations. Spain’s reform, led by Minister José Luis Escrivá, will not be enough by itself to balance the accounts with the EU, and the automatic adjustment mechanism enshrined in the law will come into play. The governor also questions the control of rental prices under the new housing regulation. On the financial side, he calls for prudent profit distribution and stronger capital buffers against possible risks.
Up revision
The next growth projection review by the Bank of Spain is scheduled for June. The message from the general manager of economics and statistics, Angel Gavilan, is cautiously optimistic: growth could be revised higher if the INE’s upward revisions for late 2022 and early 2023 materialize in line with or above current expectations. Still, Gavilan cautions that this may not translate into the June projection, given several factors that could temper momentum, including a further rise in interest rates as ECB policy remains tight and its effects on the real economy deepen.
Interest rate hike slows growth
The Annual Report explains that most monetary policy tightening effects have begun to show through this year, with higher borrowing costs weighing on activity. Bank of Spain models indicate the recent rate increases have dampened loan performance. In 2022, inflation averaged around 8.4%, and the projection for 2023 sees inflation falling, with a continued reduction into 2024. The biggest drag on growth is seen as the magnitude of the 2022 price spike fades, while the interaction of inflation and wages shapes the near-term outlook.
Mortgages and bank deposits
Across the euro area, deposits rise more slowly as rates climb, yet new mortgage costs have already become more expensive. From December 2021 to February 2023, rates increased by about 2 percentage points, and could rise further if past models hold. In the banking sector, wage growth and liquidity conditions influence the pace of rate transmission. Spain carries a high level of public bank liquidity and comparatively less intense competition, factors the Bank of Spain says help explain why lending terms and deposit growth respond differently across the market.
Inflation and wages
The Bank of Spain expects inflation to slow from 2022’s peak, with a forecast of about 3.7% for 2023. For 2024, inflation is seen easing further, and the government’s anti-inflation measures adopted since 2021 should gradually unwind. The bank estimates a 1.6 percentage point contribution to next year’s rate, putting inflation near 3.6% in 2024, with 2025 inflation near 1.8%. The governor emphasizes that the salary agreement could help share the burden of rising employment costs between employers and workers, while energy and other imported inputs keep inflation dynamics in play.
Public debt and pensions
The Bank of Spain notes that high public debt remains a key vulnerability for the economy, especially relative to stringent regulatory standards. The pension reform approved by the government raises spending without an equivalent rise in revenues, suggesting additional measures will be needed from 2025 to sustain financial balance. The Annual Report signals a policy path focused on long-term fiscal sustainability.
Vulnerable families for shelter
In recent years, the governor has warned that access to housing remains tight for many households, raising the risk of social exclusion for those with limited means. Bank of Spain calculations show that nearly half of renters face poverty or exclusion, with more than 40% of disposable income going toward housing. The new housing law is seen as a step in the right direction, though rent controls could have side effects, including reduced supply and potential quality losses in new leases.
Guarantees for youth mortgage
Angel Gavilan, the Bank of Spain’s general manager for economics and statistics, voices reservations about a government plan to provide public guarantees covering 20% of a young buyer’s mortgage down payment. He argues that prudent lending should cap loans at around 80% of a home’s value, rather than reaching 100% as some programs would allow, raising concerns about risk in the housing market and lending practices.