Spain is a country known for delicious food, quality wine, pristine beaches, and exceptional parties (e.g Ibiza – may come to mind); however, Spain has also recently shown its economic merit by outperforming various European peers during the past year. Spain is the fourth largest economy in the Eurozone, and its foundation is built mostly on SMEs and mid-market businesses.
For the past several years Spanish companies have delivered above-average levels of profitability with lower levels of leverage vs European peers1, and providing a risk premium over other markets, making Spain a quite unique and attractive place for institutional investments.
This article reviews six key macroeconomic metrics, posing the underlying question:
How competitive is Spain and is it well positioned for future growth?
Six Key Macro Indicators
Annual GDP Growth
Spain grew 2.5% in 2023, a noticeable decline from the 5.8% growth seen in 2022 when rebounding from the pandemic; however, a respectable increase compared to its European peers, outpacing France (0.9%), Italy (0.9%) and Germany (-0.3%)2. Lower energy prices and a surge in tourism were the main growth drivers for the country. In 2024 Spain’s GDP is forecasted to continue to grow above the European average (1.6% vs 0.8%)3, mostly fueled by internal demand.
Inflation
Over the past year, inflation in Spain settled at a moderate level of 3.1% in December 2023, down from an annual high of 6.1% in February2. Stability in consumer and food prices, as well as lower energy prices, not only brought inflation down, but also boosted domestic spending, as evidenced by higher consumer confidence. Inflation in the eurozone is lower at 2.8%, but remains above the ECB's target of 2%, keeping the ECB's main refinancing rate at 4.5%, its highest level in 22 years. Although Spain's inflation rate is 0.3% higher than in the eurozone, this is justified by Spain's higher growth rate.
Unemployment
Unemployment rates in Spain fell to levels not seen since 2008 (11.6% in June 2023)2 and have remained below 12% for the second half of 2023, finishing the year at 11.8% in December. Low unemployment and moderate inflation have allowed the Spanish economy to push forward as companies continue to manage the higher rate environment. However, the unemployment rate could creep higher if interest rates remain at elevated levels throughout 2024 and beyond.
Real Estate Prices
Typically, a person’s largest investment is the purchase of a home, and this investment can strongly influence the perception of self-wealth and spending habits, especially for high-income households (i.e. housing prices up = higher perception of wealth → increase discretionary spending). In Spain, housing represents about 40% of the wealth of a spaniard. Spain’s housing sector has been resilient over the past year, as real estate prices have steadily risen in 2023, mostly due to limited supply and higher incomes. In 2023 housing prices in Spain increased at a faster pace than in Italy, Germany and France and have shown less volatility since 2022. However, in 2023 we have seen a decline in mortgage lending, a direct consequence of higher interest rates, as people are unwilling to take on higher mortgages and use free cash to reduce their debt. Having learned the lessons of the last financial crisis, Spanish banks are also playing it safe as demand for housing continues to outpace their lending appetite. The price bubbles in Spain have been driven mainly by foreign demand in limited areas (central Madrid, Marbella, and Majorca).
Bankruptcies Declared
During the first eight months of 2023 declared bankruptcies in Spain fell to moderate pre-COVID levels hovering around 1,600 companies per month. Since September, however, we’ve seen an upward trend with declared bankruptcies reaching 2,669 in December, well above the historical monthly average of 1,189 since 19805. As long as interest rates continue to remain high, Spanish companies will continue to face tighter margins, and deteriorating coverage ratios. Bankruptcies across Europe are forecast to rise throughout the first half of 2024 and then plateau for the rest of the year.
Tourism
Tourism is the heart of the Spanish economy, attracting tens of millions of visitors from around the globe each year. In 2023 more than 85 million tourists visited Spain kick-starting GDP and re-boosting employment. Hotel occupancy rates in 2023 surpassed levels for the past four years and average prices per occupied room peaked in August at €136.506. As unemployment remains relatively low across major countries and families still have the capacity to save for vacations; Spain will remain a top destination due to its favorable weather, affordability, and world-class experiences. We anticipate Spanish tourism to remain strong in 2024.
Risks for 2024
As we move further into 2024, there are several potential headwinds to consider that could derail a soft landing. These include:
- An escalating war in Europe and/or the Middle East.
- Central Banks reducing rates too quickly could lead to an acceleration in inflation. On the flipside, a reduction in rates too slowly could impede economic growth and increase the likelihood of defaults.
- Further supply chain disruptions and increasing energy prices.
- The upcoming regional elections in Spain in 2024 could potentially destabilize an already tenuous political landscape.
The future trajectory of the Spanish economy remains uncertain. While the current rate of growth is encouraging, there is a possibility that an unforeseen event could derail this momentum. Nevertheless, Spain has concluded 2023 on a positive note, despite the challenges posed by a controversial election year. With the support of the European Central Bank, 2024 should be more of the same.
1 Banque De France Bach Database 2021
2 European Central Bank
3 OECD, January 2024
4 Data: Eurostat
5 National Statistics Institute
6 Bloomberg
