The European Commission in Brussels has released its latest economic prognosis for Spain, forecasting robust growth yet raising concerns about the nation’s ability to meet fiscal requirements by 2024. Spain, one of the top four largest economies in the European Union alongside Germany, France, and Italy, is expected to be among the fastest-growing member states, with a projected gross domestic product (GDP) growth of 2.4% by the end of 2023.
This growth is primarily attributed to consumer spending, indicating a resilient economy. However, the Commission anticipates a slight dip in growth to 1.7% in the following year, with a subsequent rebound to 2% by 2025. Notably, Spain stands out as the only major economy in this quartet poised to experience growth exceeding 1.5% over the next two years, setting it apart from potential contractions in Germany, as per the Commission’s report.
Despite its economic vitality, Spain is grappling with a shift in its inflation dynamics. Traditionally holding the position of having the lowest inflation among the largest EU economies, Spain’s inflation rate has now risen to 3.5%, up from below 3% earlier this month. The surge is predominantly attributed to a spike in the cost of groceries, particularly food and non-alcoholic beverages, witnessing a 9.4% inflation rate in Spain. Though a slight decrease from September’s 10.5%, it remains notably higher than the Eurozone’s current average of 7.5%.
Contrary to the general trend in the Eurozone, where inflation has been gradually decreasing to 2.9% in October, Spain has experienced a divergence in recent weeks. While the Eurozone inflation rate plays a crucial role in determining the Euribor (Euro Interbank Offered Rate), it is expected to rise again before the end of 2023. The Euribor, influenced by the European Central Bank’s target inflation rate of 2%, witnessed record hikes, rising from below zero to over 4% in less than a year and a half.
Spain’s challenge extends beyond inflation concerns. Despite predictions of higher-than-average growth and relatively standard inflation, the Commission warns that Spain is likely to fall short of meeting stipulated deficit levels in 2024. The Commission notes that Spain’s deficit has become ‘structural,’ persisting irrespective of economic performance, consistently remaining 3% above its GDP. The government’s commitment to reducing the imbalance in public accounts, limiting the deficit to a maximum of 3%, may prove challenging, with the Commission expressing doubt unless ‘something exceptional happens.’
Financial challenges
The fiscal situation is compounded by Spain’s overall debt, expected to reach 107.5% of its GDP by the end of this year. While a gradual decrease to 106.5% is anticipated, the debt level is projected to plateau at this level in the medium term. Brussels, which had relaxed fiscal rules in response to the pandemic, is set to reinstate the ‘GDP+3%’ ceiling from 2024 onwards. Failure to comply with this rule, keeping debts within 103% of GDP, could result in significant fines and fiscal stipulations.
Spain is not alone in facing these challenges; the Commission anticipates that ‘at least a dozen’ EU member states will miss the GDP+3% cutoff point in 2024. France and Italy, in particular, are predicted to have deficits well above 104% of their GDP next year. As the economic landscape evolves, Spain finds itself at a crucial juncture, navigating growth, inflation, and deficit challenges that will shape its economic trajectory in the coming years.