Why is Spain’s economy growing faster than its eurozone peers?

Spain’s economy grew 3.4% year-on-year in the period from July to September, according to new data from Eurostat out on Wednesday.

That figure stands above growth rates seen in other nations, with the eurozone average coming in at 0.9%.

One reason for the steep increase in GDP is that Spain was disproportionately affected by the pandemic. Partly due to the country’s reliance on tourism, the Spanish economy took longer to recover from the shock.

When thinking about why Spain is outpacing its peers, it is therefore important to remember this base effect. Recovery often seems dramatic when compared with an unusually low starting point.

Even so, Spain is now on a faster growth trajectory than its 2013 to 2019 average – meaning this isn’t the full story.

Tourism and other exports

According to recent data from Spain’s Instituto Nacional de Estadística, the country received 9.6 million international tourists this September. That’s a 9.1% increase compared with the same period a year earlier.

When looking at spending by international visitors, meanwhile, this rose to 12.62 million, a 12.7% year-on-year jump.

“While tourism is expected to remain strong, the pace of growth might moderate as the initial surge of post-pandemic travel cools down,” said Professor Ruben Dewitte, economist with ING.

“This growth is unlikely to continue at the same pace and tensions with the local population are already present,” he added.

Spain has seen several protests against mass tourism as residents air their anger at rising rents, precarious jobs, and other negative consequences of the industry.

Miguel Cardoso-Lecourtois, chief economist at BBVA Research, told Euronews that he also expects a “slowdown” ahead in terms of Spanish growth.

“The contribution of external demand should turn negative next year due to limits to the expansion of tourism services exports and the transition to a growth model with higher spending on imported goods,” he explained.

Cardoso-Lecourtois added that, looking forward, Spain’s exports may not benefit as much as expected from recovery in the eurozone.

He blamed this on bottlenecks in the country hitting areas like the car, pharmaceutical or clothing sectors. 

These may “suffer from regulatory uncertainty, the consequences of high growth during the pandemic and changes in preferences”, he explained.

Fluctuations in demand can negatively impact a sector as this can lead to oversupply or undercapacity, as well as causing spikes in labour costs.

Immigration

Spain’s strong export figures, along with robust consumption, have only been made possible thanks to the health of the country’s labour market.

In the third quarter of this year, the country’s unemployment rate fell to 11.21%, its lowest level since the financial crisis of 2008.

A supply of available workers, mainly boosted by immigration, has allowed Spanish companies to increase production without overly straining their budgets.

“The foreign-born active population grew by 9.1% year-on-year last quarter, compared to a native population growth of 0.6%,” said Professor Ruben Dewitte.

He added: “While this can support economic expansion, the stagnant productivity per full-time equivalent job also highlights the need for policies that ensure these workers are integrated into the economy productively to further spur economic growth.”

Ángel Talavera, head of Europe economics at Oxford Economics, also told Euronews that while “the surge in migration” has helped to boost Spain’s growth, one must distinguish between headline GDP and GDP per capita.

As the Spanish population is growing, the average economic output per person isn’t increasing as dramatically as the national output.

“Spaniards have seen a lot less improvement than in the aggregate numbers, which helps explain why there is still some discontent despite the strong economic figures,” said Talavera.

Public spending

State investment is also one of the factors behind Spain’s recent growth trends.

The country is notably set to receive €163bn through the European Union’s Next Generation EU fund, created to support countries with their post-pandemic recovery.

As of late October, €48.3bn of this had been received by Spain.

“The long-term impact of NGEU funding will depend on its ability to spur long-term investment and productivity growth, and therefore, the strength of its multiplier,” said Professor Ruben Dewitte.

Looking ahead, Juan Carlos Martínez Lázaro, professor of economics at IE University, told Euronews that “consumption should remain robust” in Spain, “especially now that inflation is already below 2%”.

“The change in the ECB’s monetary policy will boost consumption and, hopefully, investment,” he explained, highlighting private investment as an area for improvement.

Professor Evi Pappa from the Universidad Carlos III Madrid also expressed cautious optimism.

“In theory, if Spain’s GDP growth remains strong, the debt-to-GDP ratio could stabilise over the long term, as a growing output would help manage the existing debt burden.”

“However, Spain’s ability to maintain its output growth depends on productivity-enhancing investments and structural reforms,” she clarified.

Pappa stressed that there must be a differentiation drawn between short-term growth boosters and long-term gains, which hinge on productivity.