A Glimpse into Spain’s Economic Scenario
Despite the looming global and monetary risks on the horizon, the Spanish economy appears resilient. Assessing the current economic climate at the onset of this year, we find a handful of indicators, all coherent with maintaining a moderate pace of growth. The sentiment remains positive in the service sector, with the momentum now spreading to the manufacturing industry, theoretically the most affected by major global disruptions such as armed conflicts and disruptions in Red Sea freight transport (the Purchasing Managers’ Index in the industry has risen above the 50 level, after nearly a year in contraction territory).
Moreover, the labor market continues to generate around 35,000 new jobs each month (seasonally adjusted by Funcas), much less than the boom of the previous year but still sufficient to sustain household income. Additionally, as prices moderate, leading to a slight recovery in purchasing power (negotiated wages rose half a point more than the CPI in January), a new surge in private consumption can be anticipated.
This situation contrasts with the recessionary environment prevailing in Central Europe, particularly in Germany. Despite significant state aid injections, the industry in this country grapples with energy costs and reliance on a Chinese economy burdened by a credit bubble burst. Some companies may be diverting investments to countries with lower production costs, such as Spain (in January, electricity in the Iberian market cost 42% less than in Germany). Last year, foreign direct investment from Germany increased by 50%, in contrast to the aggregate decline (based on data from the first nine months). Spanish exports of goods to the neighboring country also rose by 6.7%, compared to a 1.1% decline in total sales of Spanish companies abroad.
However, it’s important not to fall into complacency. Firstly, foreign trade cannot decouple from the vicissitudes of the rest of Europe, our primary market. Tourism will also eventually normalize once pre-pandemic levels are reached.
Furthermore, the process of disinflation will be slower in the coming months, due to the downward resilience of prices in some sectors and the transmission of the rise in hydrocarbon prices to the rest of the CPI. This circumstance dampens the improvement in household purchasing power and private consumption, while cooling the prospect of an imminent interest rate reduction. This time, public consumption, which accounted for half of the growth recorded at the end of last year, cannot take the baton, given the budgetary extension situation.
The main concern arises from investment, which remains sluggish despite the disbursement of a substantial volume of European funds. Residential investment, in particular, does not respond to strong demand or worsening scarcity: in the last year, around 100,000 new homes were approved, less than half the increase in the number of households. The surge in supply depends on the availability of land and construction permits, i.e., public policy. Similarly, the recovery of business investment depends in part on the pace of execution of European funds.
In the immediate future, we will continue to highlight a commendable growth, close to 2% on an annual basis. However, it remains necessary to strengthen the foundations on which the economy rests to achieve higher levels of social well-being, undertaking reforms while the winds are in our favor.
IPC Update:
The Consumer Price Index (CPI) continues its deceleration path, reaching a year-on-year increase of 2.6% in the eurozone and 2.9% in Spain (harmonized data) in February. However, excluding energy and fresh food, the deceleration is less pronounced: in the same month, the core CPI rose by 3.3% in the eurozone and 3.4% in Spain. As in previous inflationary episodes, service sectors less exposed to competition show little inclination to pass on the moderation of production costs to their prices. The eurozone’s service sector CPI increased by 3.9% annually in February.