Spain Country Risk Report

Despite the ongoing global challenges, the Spanish economy has remained resilient and has over-performed its peers in recent years. It recorded robust growth in 2024, supported by solid private and public consumption, while investment and foreign trade turned out more volatile.

Looking ahead, Spain’s economic activity will still be supported by rebounding domestic demand. Enhanced household consumption, fueled by real income increases due to lower inflation rates, job creation and wage growth in a robust labor market, will play a significant role. Additionally, gross fixed capital formation will contribute substantially to growth, spurred by NGEU investment projects, with the related spending expected to catch up in 2025-2026. While net external demand will improve in the short term, its overall contribution to GDP growth will be more moderate compared to previous years as an increase in goods and non-travel services exports will be balanced by a rise in imports (linked, inter alia, to the increase in the import content of gross fixed capital formation) and a levelling off in travel service exports. In 2025, we expect Spain to mark its fifth year of GDP growth overperformance compared to the Eurozone average, but the pace will moderate: +1.8% in 2025 and +2.0% in 2026.

Inflation was on the rise in the last quarter of 2024 after falling to its lowest level since the beginning of 2021 in September 2024. Headline inflation is expected to remain on a slightly upward path in early 2025 and then to resume a downward path later in the year. We expect inflation to reach 2.1% in 2025 and 1.9% in 2026, after 2.7% in 2023.

In parallel, the labor market showed positive developments, driven primarily by the 2021 labor market reform that helped curb dualism between permanent and temporary work, as well as large migration inflows. Job creation accelerated in December 2024, adding 35,500 new registered workers, up from the 29,900 recorded in the same month of 2023. Thus, the Spanish labor market closed the year with an increase of over 500,000 new registered workers. Finally, the number of unemployed persons fell by 25,300, placing the total at 2.56mn, the lowest figure since December 2007. However, structural challenges remain to be tackled: unemployment remains high compared to peers and productivity is low.

Spain is ranked 31 out of 190 economies in the World Bank's Ease of Doing Business rankings, ahead of other major European economies such as France (33), Italy (58) and Portugal (39). Despite reforms since the 2008‑09 crisis, structural weaknesses persist, particularly an over-reliance on tourism and labor market inefficiencies.
Spain faces higher risks to employment, given the predominance of SMEs, which are more vulnerable to liquidity shocks, and the high share of temporary contracts. Spain relies on EU demand and supply more than other countries and energy prices have escalated faster than in Eurozone overall, which worsens the balance of risks. As a result, sectors such as transport, the electro-intensive industry and construction might be significantly affected.

Political stability in Spain is expected to remain fragile, even after the re-election of Pedro Sánchez, the leader of the centre-left Spanish Socialist Workers' Party (PSOE), as prime minister in mid-November 2023. The government is likely to be inherently unstable due to its reliance on a high number of regional parties, each with its own competing interests. This situation significantly increases the risk of policy paralysis and the potential for the government to collapse before the end of its term in 2027.

Finally, Spain's effective use of the NGEU funds is crucial to sustain its economic recovery and long-term growth, addressing structural challenges and ensuring a more sustainable and inclusive future. Within the NGEU instrument, Spain is one of the main beneficiaries, set to receive EUR160bn in loans and grants until 2026. The transformative impact of Spain’s plan stems from a robust combination of reforms and investments designed to address the country's specific challenges. The reforms aim to eliminate bottlenecks to lasting and sustainable growth, while the investments are strategically targeted to accelerate the transition towards a more sustainable, low-carbon and climate-resilient economy. Additionally, they seek to maximize the benefits of digital transformation and ensure social cohesion. The plan also focuses on improving connectivity within the country, enhancing labor market performance, boosting the economy's innovation capacity and making public spending more efficient and sustainable.