Why is Spain growing faster than the rest of the euro zone?

The Spanish economy has shown strong growth in recent years, although some experts have expressed concerns about the sustainability of this growth. According to the latest data released by Eurostat, Spain's economy grew by 3.4% year-on-year in the July-September 2023 period, a growth rate significantly higher than that of other countries, and the average growth in the euro area was only 0.9%. One of the reasons for Spain's huge economic growth is that the country has been badly affected during the pandemic. Because the Spanish economy is highly dependent on tourism, it will take longer to fully recover. The base effect cannot be ignored when one considers why Spain has been able to outperform other economies. Compared with an unusually low starting point, the recovery is particularly pronounced. However, it is worth noting that Spain's current growth rate is still faster than the average between 2013 and 2019, suggesting that there are more factors behind this phenomenon.

First, in tourism and other export sectors, Spain received 9.6 million international visitors in September, up 9.1 per cent from the same month last year, according to the National statistics office. At the same time, the total amount spent by international tourists also reached 12.62 million euros, an increase of 12.7%. Professor Ruben De Wit, an economist at ABN Amro, said: "While tourism is expected to remain strong, the pace of growth is likely to slow as the post-pandemic travel boom fades. This growth is unlikely to last, and the previous boom may also lead to discontent among local residents." Indeed, Spain has seen a number of protests recently, with residents expressing anger over rising rents, job insecurity and other negative effects of tourism.

Second, there are some industry bottlenecks behind this phenomenon, especially in the automotive, pharmaceutical and apparel sectors. Challenges facing these industries include regulatory uncertainty, the consequences of high growth during the pandemic, and changing consumer preferences. Fluctuations in demand can adversely affect certain industries, leading to oversupply or insufficient production capacity, while also triggering a spike in labor costs. Spain's strong export figures and consumer dynamism have benefited from a healthy Labour market. The country's unemployment rate fell to 11.21 percent in the third quarter of this year, the lowest level since the 2008 financial crisis. The rise in immigration has left Spain with an ample supply of workers, allowing companies to ramp up production without significantly increasing spending. While the "immigration surge" has contributed to Spain's economic growth, it is important to note the difference between overall GDP and GDP per capita.

Finally, state investment is also an important factor driving Spain's economic growth. Spain will receive €163 billion through the EU's Next Generation EU fund, which is designed to support countries in their post-pandemic recovery. By the end of October, Spain had received 48.3 billion euros of that. "The long-term impact of these funds depends on their effectiveness in stimulating long-term investment and productivity growth, as well as the strength of their multiplier effect," said Professor Ruben DeWitt. Looking ahead, Juan Carlos Martinez Lazaro, professor of economics at IE University, said in an interview with Euronews that consumption in Spain will remain strong, especially in the context of inflation already below 2%. He stressed that the ECB's monetary policy changes will boost consumption and investment, while private investment is an area that needs to be improved.

Taken together, Spain's low private sector leverage, strong banking sector, current account surplus, and improving labor market are its main strengths. However, the country also faces a number of challenges, including structural issues such as a rising debt burden and an aging population, which could have implications for fiscal stability. According to Eurostat's latest forecasts, the Spanish economy is expected to grow by 1.7% in 2024 and 2% in 2025, both above the EU average. Consumption and investment will be the main drivers of economic growth this year, with private consumption benefiting from rising real incomes and the utilization of household savings, while investment growth will benefit from the broad-based implementation of the recovery plan. While underlying price pressures are easing, the government's phasing out of energy price relief is likely to push inflation higher in the near term.