Challenging times for Spain’s economy

A plane departs from Adolfo Suárez Madrid-Barajas airport, the Cuatro Torres Business Area in the background (Madrid, Spain)

Spain faces a rocky 2023 with sluggish economic growth and job creation, high but slowing inflation (6.8% year-on-year in November), soaring electricity bills amid the global energy crunch and water shortages in some areas due to drought.

The economy grew by around 4.6% in 2022, but behind this lies a declining trend, due to falling consumption, shortages of raw materials, the tightening of financial conditions, the consequent rising financial burden on companies and households, and the inflation impact. Quarter-on-quarter growth dropped from 1.5% in the second quarter to a mere 0.2% in the third and a possible slight contraction in the fourth. Household savings began to fall in October from a record €997.4 billion in July as consumers drew on them.

The European Commission forecasts growth of 1% for the whole of 2023 (see Figure 1). Economic output is not expected to recover its pre-pandemic (2019) level until the second half of next year.

Figure 1. European Commission GDP growth forecasts, 2022 and 2023

Euro zone3.20.3
Source: European Commission.

The vital tourism industry (12% of GDP in a ‘normal’ year), however, is recovering. The number of international tourists in the first 10 months was 63 million (83.7 million for the whole of 2019, before the pandemic). Arrivals in the key month of July (9.1 million) almost equalled those in the same month of 2019.

The dramatic fall in tourism in 2020 and less so in 2021 was the main reason why Spain suffered the largest fall in absolute terms in the latest Elcano Royal Institute Global Presence Index. Its score declined from 307 to 272.3, but it remained in 13th place (see Figure 2).

Figure 2. 2021 Elcano Global Presence Index, top 20 countries, 2021, 2020 and 2010

Country2021 score2020 score2010 scoreCountry2021 score2020 score2010 score
1. US3,241.53,247.82,844.611. India319.0340.2271.2
2. China1,364.91,303.0678.412. S. Korea311.0311.7211.8
3. Germany860.2863.6890.713. Spain272.3307.0363.5
4. Japan853.5830.8618.514. Switzerland259.9233.2211.2
5. UK835.3850.1893.515. Australia248.0248.7225.8
6. France703.7726.7761.516. Belgium219.3208.8252.6
7. Russia Fed.562.1581.4474.917.Singapore206.9213.0147.1
8. Canada484.5462.5401.418. Ireland202.2174.7127.5
9. Netherlands420.7429.2423.519. Turkey172.3185.7113.6
10. Italy365.3388.2437.520. Sweden149.5143.4161.0
Source: Elcano Royal Institute.

The index measures the ability of countries to project themselves beyond their borders and the extent to which they are participating in and shaping the process of globalisation. It is based on three main fields. First, it ranks a country’s economic presence, including measures of exports, outward foreign direct investment and other elements. Secondly, it assesses a country’s military presence, which is determined by the number of troops deployed abroad and the equipment available for deployment, Third, it includes statistics on a country’s soft presence, which is based on a wide number of factors including exports of cultural products, tourist arrivals and official development aid.

Merchandise exports have also held up very well. They were 23.6% higher year-on-year in the first nine months, at a record €319.7 billion (see Figure 3).

Figure 3. Exports and imports, first nine months, 2016-22

First nine monthsExports (€ bn)Imports (€ bn)Balance (€ bn)Coverage (%) (1)
(1) % of imports covered by exports. Source: Industry, Commerce and Tourism Ministry.

The Socialist-led minority coalition government approved a series of steps to help companies and households cope, including €16 billion in direct aid and soft loans, an increase in the minimum vital income, a cap on regulated gas prices until the end of 2023, a petrol rebate of €0.20 per litre (to be more targeted), a reduction in VAT on natural gas bills from 21% to 5% and mortgage relief measures such as extending loan repayments for more than one million households.

Energy security risks are relatively low because Spain has a limited dependence on Russian gas, a well-developed liquefied natural gas infrastructure and alternative energy sources. Also, the so-called Iberian mechanism allows Spain and Portugal to artificially reduce wholesale electricity prices by capping the price of gas used for electricity generation.

A windfall tax is to be imposed on power companies and banks, which is expected to bring in a total of €7 billion in 2023 and 2024, while residents with more than €3 million in wealth have been hit with a new asset tax that will only affect around 23,000 people (0.1% of all taxpayers).

The number of jobholders exceeds the pre-pandemic level. The 2021 labour reforms are increasing permanent employment, but the jobless rate is still high at 12.5% (almost double the euro zone average), albeit down from 15% a year earlier and a whopping 24% in 2012 following the global financial crisis (see Figure 4).

Figure 4. Seasonally-adjusted unemployment rates, October 2022 (%)

Euro zone6.5
Source: Eurostat.

Paradoxically, there are labour shortages, particularly in the hospitality and agricultural sectors. A government decree in July eased requirements for foreign workers without legal documents in order to bring them into the official labour force and make it easier for employers to hire workers from their home country. The Migration and Social Security Ministry estimates there are 500,000 people working in Spain’s underground economy.

The 9 million pensioners, a politically important segment of a population (a general election is due by next December) that is fast ageing, will, unlike public and private sector workers, maintain their purchasing power. Pensions will rise in 2023 by 8.5%, in line with this year’s average inflation. The government restored the indexation of pensions to inflation in 2021, raising concerns about the system’s long-term sustainability if sufficient mitigating measures are not taken. Pension increases coupled with the rising number of pensioners will account for around 30% of total government spending in 2023.

In its latest statement on the Spanish economy, the IMF says that indexation and repealing the sustainability factor are expected to raise annual pension outlays by more than 3% of GDP by 2050 compared with the full implementation of the previous legislation, and that only part of the increase will be offset by other measures adopted in the first phase of the reform.

Further measures were taken this year, most notably the reform of the contribution system for the self-employed, but more are needed, such as extending the computation period for calculating pensions. The government is committed to sending proposals to the European Commission by the end of the year.

A long-term challenge is to boost labour productivity growth rates, which are lower than in peer economies. Vocational education reform should help enhance skills. While the share of tertiary-educated 25-to-34-year-olds increased from 34% in 2000 to a notable 49% in 2021, at the other end of educational attainment 28% of this age group still do not have the upper secondary education certificate, more than double the EU average (see Figure 5).

Figure 5. Trends in educational attainment of 25-to-34-year-olds, 2011 and 2021 (% of those with a given level at the highest attained)

Below upper secondaryUpper secondary or post-secondary non-tertiaryTertiary
EU-22 average161248423646
Source: OECD, Education at a Glance 2022.

The €140 billion of the so-called Next Generation EU funds available for Spain, the second largest amount after Italy, should also spur the recovery, but not as quickly as hoped. While the European Commission says Spain is implementing its plan on how to spend the money ‘in line with the agreed timetable’, only 22.3% of the €28.4 billion budgeted for this year had actually been paid out by the end of September, according to official figures. The Círculo de Empresarios, a business lobby, complains of a lack of transparency and capacity in the government to handle such a large volume of funds, of delays and of too much bureaucracy. All in all, a challenging year ahead.

Image: A plane departs from Adolfo Suárez Madrid-Barajas airport, the Cuatro Torres Business Area in the background (Madrid, Spain). Photo: Calvin Smith (CC BY 2.0).