Bank of Spain Raises GDP Growth Forecasts Amid Economic Challenges
The Bank of Spain has updated its economic outlook, raising its projections for the nation's Gross Domestic Product (GDP) growth for both 2024 and 2025 by three-tenths to 3.1% and 2.5%, respectively. Despite maintaining its forecast for 2026 at 1.9%, the agency anticipates a slight slowdown in 2027, predicting growth will decelerate to 1.7%. In its latest quarterly report, the Bank highlighted the resilience shown by the economy in the third quarter, which has led to a more optimistic forecast for the closing months of the year.
Despite the adverse effects of 'DANA' – a significant weather event that impacted several provinces in late October – the Bank believes economic activity remains vigorous. Current indicators suggest that GDP growth might hit between 0.6% and 0.7% in the fourth quarter, even after accounting for a potential reduction of between 0.1 and 0.2 percentage points due to DANA. The Bank of Spain also sees this adverse impact as temporary, expecting it to be offset by various fiscal stimulus measures rolling out in early 2025.
With a focus on internal demand, particularly private consumption, the Bank's forecasts indicate a robust contribution to GDP growth between 2024 and 2027. Rising employment, improved disposable income, and positive household confidence are expected to drive this growth. Moreover, private investments (gross capital formation) are set to recover significantly due to the enhanced availability of funds under the Next Generation EU (NGEU) program.
Inflation trends show a decline; the Bank projects an average inflation rate of 3.4% in 2023, dropping to 2.9% in 2024, followed by 2.1% in 2025. However, an expected increase in energy prices, driven by a new emissions trading scheme in the European Union, may cause overall inflation to rise again to 2.4% in 2027.
On the labor market front, employment is anticipated to grow by 2.1% in 2024, slowing in subsequent years until nearly stagnating at around 1% in 2027. These employment increases are projected to coincide with modest productivity gains, helping to bridge the gap created during the COVID-19 pandemic. Unemployment is forecasted to gradually decline to below 10% by 2027, reaching approximately 9.9%.
The latest report outlines a mixed outlook for the fiscal situation. The Bank has revised its deficit projections for 2024 up to 3.4% of GDP, partially due to increased spending related to DANA recovery efforts. However, there are improvements in deficit forecasts for 2025 and 2026, which have been reduced to 2.9% and 2.7%, respectively, suggesting a declining trend toward the European Union's fiscal benchmarks.
In terms of public debt, projections for 2024 have improved, estimated at 103.1% of GDP, and expected to reduce further to 102.6% in 2025. By 2027, debt is projected to drop below 102%.
Internationally, the Bank flagged potential risks from changes in U.S. economic policy under a new administration led by Donald Trump, uncertainties surrounding ongoing geopolitical conflicts, and political instability in key European economies such as Germany and France. Domestically, worries persist over the pace of disinflation and the rebound of business investments, emphasizing the complexity of Spain's economic landscape as it navigates challenges and opportunities in the coming years.
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