Spain enters 2025 with its economy walking a fine line between resilience and vulnerability. A recent report by BBVA Research titled Situación España: Diciembre 2024 paints a nuanced picture of robust short-term growth tempered by mounting medium-term challenges. While the country has defied expectations with a projected 3.1% GDP growth in 2024, structural vulnerabilities and global headwinds threaten to complicate its economic trajectory.
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A Resilient 2024
The Spanish economy performed better than anticipated in 2024, with growth revised upward due to stronger-than-expected private consumption and a buoyant labor market. The report highlights that internal demand, particularly spending on services and durable goods, has been a key driver. Employment rates also outperformed projections, with a steady decline in unemployment to 11.4%, on track to reach 10.4% by 2026.
The agriculture sector, recovering from prior droughts, contributed to this momentum. Normalization in hydrological conditions spurred growth, providing relief to a sector that had suffered a 15% contraction in its gross added value during the worst of the drought.
However, not all is rosy. Investment in machinery and equipment lagged behind expectations, and while housing construction showed signs of recovery, a persistent mismatch between housing demand and supply continued to pressure affordability. Structural bottlenecks in construction have compounded the problem, with urban areas feeling the crunch most acutely.
Storm Clouds on the Horizon
Two significant disruptions loom over Spain’s otherwise positive outlook. The first is the impact of the DANA (a severe localized weather event) in the Valencia region. While its overall impact on the national economy is modest—estimated at a reduction of just 0.1 percentage points of GDP in 2024—it underscores Spain’s vulnerability to climate-related shocks. Local economic activity in Valencia suffered a significant blow, with employment declining by 2.9 percentage points in November 2024.
The second disruption comes from across the Atlantic. The return of protectionist policies under the new U.S. administration has cast a long shadow over global trade. BBVA Research projects that a 10% increase in U.S. tariffs on European imports, combined with a 60% hike for Chinese goods, could shave up to 0.7 percentage points off Spain’s GDP growth by 2026. While Spain’s trade exposure to the U.S. is less pronounced than that of some of its European peers, the automotive and chemical sectors are likely to bear the brunt of this new reality.
Tourism at a Crossroads
Tourism, a cornerstone of Spain’s economic success, is showing signs of strain. Visitor spending remains elevated, with consumption by non-residents growing at an impressive 11.4% in 2024. Yet there are concerns about sustainability. Urban congestion, rising housing costs, and regulatory tightening are beginning to weigh on the sector. Investment in tourism infrastructure has slowed, with construction permits for tourism-related buildings dropping 26% year-on-year by September 2024. BBVA Research warns that the limits of growth in this sector may already be in sight.
Global Trends, Local Realities
On the global stage, declining oil prices and an oversupplied Chinese market have helped to keep inflation in check, aiding Spanish households. Inflation is forecast to stabilize near 2% by 2025, bolstered by lower energy costs and a drop in food prices as agricultural production recovers. These factors, along with falling interest rates, are expected to enhance household disposable income and support consumption growth.
Yet risks abound. Spain’s economy remains tethered to global uncertainties, including geopolitical tensions, fiscal challenges, and an aging population. BBVA Research highlights a persistent housing shortage as a structural drag, warning that insufficient housing supply could hinder long-term economic dynamism and constrain labor market flexibility.
The Fiscal Dilemma
Fiscal consolidation remains a thorny issue. Spain’s public deficit, though improving, is projected to remain at -3% of GDP in 2024, narrowing to -2.4% by 2026. Public debt will decline gradually but still hover at 100% of GDP, limiting room for policy maneuvering. While BBVA Research acknowledges the recovery from pandemic-related fiscal strains, it raises concerns about the cost of servicing debt, pension liabilities, and adherence to newly tightened EU fiscal rules.
Looking Ahead
Spain’s economic story is one of cautious optimism. The country has demonstrated remarkable resilience in the face of global and local shocks, with robust consumption and employment growth laying the groundwork for continued recovery. However, as the BBVA report makes clear, the road ahead is fraught with challenges. From the lingering effects of protectionism to structural bottlenecks in housing and tourism, Spain must navigate a complex array of risks.
The task for policymakers will be to balance short-term stimulus with long-term structural reforms. Addressing housing shortages, bolstering investment in key sectors, and maintaining fiscal discipline will be crucial. Spain’s potential to sustain high growth rates is evident, but realizing that potential will require decisive action in an increasingly uncertain world.