The Economic Observatory of Francisco de Vitoria University (UFV) has released its “Fall 2024 Outlook” report, a comprehensive analysis that assesses the structure of the Spanish economy and its recent performance within the European context. This report highlights that, although the national economy shows resilience in the short term, it faces significant structural challenges that could complicate its evolution in the medium and long term.
The report highlights that recent economic indicators show that Spain’s Gross Domestic Product (PIB) growth exceeds the European Union average. This performance, driven in part by inflation and statistical revisions carried out by the National Institute of Statistics (INE), has led to a temporary improvement in the deficit-to-GDP and debt-to-GDP ratios, thereby facilitating compliance with budgetary stability targets.
This spillover effect improves short-term economic growth forecasts. However, the UFV Economic Observatory warns that these positive trends are temporary and do not address the structural challenges facing the national economy.
Structural Challenges Facing the Spanish Economy
The quarterly report identifies several critical areas that require attention to ensure the sustainability of the Spanish economy:
- Reliance on public spending: Recent growth has been driven by an increase in public spending, financed largely by windfall revenues resulting from inflation. However, this model is nearing its end in terms of revenue growth, which will put pressure on the structural deficit.
- Private investment and productivity: This increase in spending appears to be crowding out private productive investment, which is essential for sustainable growth that is not dependent on public spending policies.
- Public deficit: Although the public deficit has decreased in relative terms—with its ratio mitigated mainly by nominal GDP growth driven by inflation and the extraordinary revision of 2021 GDP—it continues to rise in absolute terms.
- Public debt: Public debt exceeds 1.6 trillion euros, and its financing depends on the implicit backing of the European Central Bank (BCE).
- External sector: The external sector, traditionally a driver of growth for the Spanish economy, is showing signs of slowing down due to the economic slowdown among its main trading partners and source markets for tourists.
- Trends in GDP per capita: Spain’s growth, in addition to being short-term in nature, is driven largely by population growth, but this has come at the expense of prosperity, as evidenced by trends in GDP per capita at purchasing power parity, where Spain has fallen behind the EU average, once again dropping below 90% of that average.
- Taxation and legal certainty: The current fiscal policy includes measures that, according to the report, create legal uncertainty and deter investment; the report cites the taxes on the energy and banking sectors as examples.
- Labor market: An increase in the minimum wage, the proposal to reduce the workweek, and higher severance pay could raise costs for businesses, thereby reducing demand for labor and, once again, deterring investment.
- Housing market: Restrictive housing market policies—affecting both rentals and sales—and the lack of land deregulation are putting upward pressure on rental and home purchase prices.
- Pension system: Pension spending continues to rise without any reform of the system to ensure its long-term viability. Indexing pensions to the CPI and raising contribution rates exacerbate the system’s problems, as they encourage spending rather than reducing it.
- Energy policy: The current refusal to include nuclear energy as part of the national energy strategy hinders the development of a sustainable and competitive energy model.
- Catalan quota: The proposal for an economic agreement for Catalonia, known as the Catalan quota, raises the possibility of additional budgetary challenges for the other regions under the general regime and for the central government.
