Has the growth of the Spanish economy reached its ‘ceiling’?

Spain’s economy continues to positively surprise and forecasts indicate that it will grow by close to 2% in both 2024 and 2025. This pace will be enough to lead the main European partners. A role that our country has been assuming since 2021, denying again and again the catastrophic messages of the Popular Party (PP), the extreme right and some economists and analysis centers against the coalition government.

The start of 2024 has supported expectations. The GDP (Gross Domestic Product) increased by 0.7% between January and March, compared to the last quarter of 2023. And the OECD has confirmed this week that, in 2023, Spain was the second State in the Organization where it increased the most the real income of households – once the bite of inflation has been subtracted – surpassing the level prior to the great financial crisis of 2008.

Again, a “differential growth” compared to our main partners (Germany, France or Italy), as described by the Minister of Economy, Commerce and Business, Carlos Body, last week. “The dynamism of activity has shown notable resilience in recent quarters – in comparison both with the forecasts available at the beginning of 2023 and with the rest of the eurozone,” agreed the Bank of Spain in its annual report, also published ago. few days.

The good growth data, accompanied by the record of more than 21 million workers affiliated to Social Security in April, has not prevented some experts from taking the opportunity to start wondering about the different ‘ceilings’ of the Spanish economy. “Are the seams beginning to be seen?” asks Miguel Cardoso, chief economist for Spain at BBVA Research, in a recent analysis. “The expansive cycle of the economy and its expiration,” headlines Raymond Torres, economics director of Funcas.

Doubts about the progress of activity point to “saturation” of tourism, the serious problem of access to housing, the lack of investment in general, the return of EU fiscal rules or political polarization. In addition, there are known warnings about low productivity or the high rate of structural unemployment, which despite the historic creation of jobs is not expected to fall below 10% in the coming years.

Without a doubt, such “seams” exist, and the “expiration” of growth cycles is a constant threat in our economic system, especially due to the geopolitical risks that exist outside our borders, such as the genocide in Gaza or the Russian invasion. from Ukraine.

Although in recent years the strengths and transformations have stood out more: from the energy transition (that is, the generation of clean and cheaper energy), through the unusual importance of exports of non-tourist services (consulting or related to technology), to the slightest precariousness in the labor market.

Strengths to which new drivers should be added: such as the moderation of inflation and the lowering of interest rates by the European Central Bank (ECB), which will ease the pockets of families and also benefit companies; or as the deployment of the Recovery Plan.

Tourism saturation

Among the “seams” of the Spanish economy that Miguel Cardoso, from BBVA Research, points out, is the ‘boom’ in tourism since the end of health restrictions due to the pandemic. “The contribution of foreign tourism [al crecimiento] It is enormous and its negative externalities are beginning to be perceived as relevant by society,” says this expert. “The high rates of advance of services linked to tourism explained around half of the growth in 2023 [el PIB avanzó un 2,5% el año pasado]”, explained Pablo Hernández de Cos, governor of the Bank of Spain, this Tuesday, before the Economy, Commerce and Digital Transformation Commission of the Congress of Deputies.

“The main engine of growth may be reaching the limit of its capacity,” he says. “The 19% quarterly increase in non-resident consumption during the first quarter of 2024 would place it 42% above the levels of the fourth quarter of 2019,” explains Miguel Cardoso. “While it is true that investment has managed to increase the number of tourist places available, mainly in quality segments (4 and 5 stars), and that growth is being achieved by deseasonalizing occupancy, the sector will face bottlenecks going forward,” this economist warns.

“For example, there is an increase in transportation costs; the lack of qualified labor persists; there is an increase in salary costs; and bureaucratic obstacles remain that prevent increased investment. Perhaps more importantly, there is beginning to be a saturation in destinations that reduces their attractiveness and imposes increasingly more costs on the domestic population. All this makes it more likely that future growth in demand will lead to a further increase in prices and loss of competitiveness. Eventually, if the improvement in the service does not continue, this will mean a slowdown,” diagnoses the BBVA expert.

In its annual report, the Bank of Spain argues that, from 2021 until now, “it is worth highlighting the possible positive impact on tourist arrivals of the geopolitical conflicts in the Middle East and, above all, the greater diversification in terms of destinations.” between the different Spanish regions and the greatest influx of foreign tourists in the autumn and winter season.” The two graphs that accompany this paragraph show different trends.

“Spain is surpassing Germany, Italy and France, and their respective services PMI index [índice adelantado sobre la actividad de S&P Global, que se construye en base a encuestas a empresas y cuya última lectura es de abril] remains several points ahead of its counterpart economies. Despite the political turbulence, Spain appears to be disproportionately capitalizing on tourism,” says Cyrus de la Rubia, chief economist at Hamburg Commercial Bank.

The housing problem

Another market in which alarm signals are going off is housing. “It may represent the biggest obstacle to future growth. Right now, it is estimated that households would have to dedicate around or more than 40% of their salary income to paying the mortgage in those autonomous communities or urban centers where prices are higher,” recalls Miguel Cardoso.

“In other markets, this would lead producers to increase supply. However, investment in housing has remained virtually stagnant for more than 3 years at a level 8% lower than that observed before the pandemic. New construction visas, which anticipate the future evolution of this variable, anticipate that this will remain the same in the next two years. The result will be that all the pressure from demand will continue to be transferred to prices, with the loss of well-being that this can bring for residents of Spain and the loss of attractiveness as a country that receives immigration,” says this BBVA Research analyst.

Furthermore, in the annual report of the Bank of Spain, it was insisted that our country is “the European economy where a higher percentage of people residing in the rental market are at risk of poverty or social exclusion.”

After the aggressive cycle of monetary austerity since July 2022, the start of the reductions in official interest rates that the ECB will begin in June should give some respite to the housing market. At least, it will do so through the lowering of the Euribor, the reference index for calculating mortgage payments. On the other hand, the results of the application of the new Housing Law and the rest of the coalition Government’s measures are still unknown, although initially they seem insufficient.

Without a doubt, the suffocating access to housing is a threat to the resistance of family consumption, especially the most vulnerable, even despite the moderation of inflation, which will end the year at interannual rates close to 2% according to the estimates.

A year with extended Budgets

Another “seam” of Spain’s economic growth is the extension of the 2023 General Budgets, after the coalition Government’s resignation from seeking an agreement with other partners to carry out an accounts for 2024, after the call for early elections in Catalonia. In the first quarter of this year, the consequences would have already been seen with a drop in “public consumption”.

The resignation of the 2024 Budgets pitted the PSOE and Sumar within the Executive, and has made it difficult to approve some agreements of the coalition itself. According to knowledgeable sources, the kick forward “seeks to leave this year’s deficit below 3% of GDP and exit the excessive deficit procedure ahead of time.” That is, to comply with the return of EU fiscal rules, after their suspension due to the pandemic.

From Sumar they have been insisting that “we do not share this, because for us the priority is full employment and the best fiscal cushion for the next crisis is to arrive with the widest possible labor market.” The Bank of Spain calculates that this fiscal corset, with renewed austerity recipes [eso sí, algo más flexibles que en el pasado]will entail an annual adjustment (of the difference between State income and expenses) that is equivalent to between 5,000 and 10,000 million euros.

“It is possible that public consumption has peaked, as shown by the drop observed in the first quarter,” says Miguel Cardoso, who refers precisely to “an environment where there are no general State budgets approved for 2024 and there is a commitment to fiscal consolidation for 2025”.

The investment

The last brake on the Spanish economy is the slow recovery of investment since 2020, especially in housing construction. However, it could also be seen as a source of potential growth given the deployment of the second phase of the Recovery Plan, the lowering of financing costs and the unusual importance that sectors related to intellectual property or digitalization have gained.

“The turning point should occur next year, when less buoyant demand is anticipated as a result of the normalization of consumption patterns, both public and private. The key is to strengthen the current competitive advantages, with investment being a necessary condition to achieve this, particularly in a context of accelerated technological change. In this regard, the rebound in investment is still too incipient to envisage an expansion of productive capacity. And to unblock productivity, the key to generating an unprecedented, but achievable, cycle of sustainable convergence with Europe,” reflects Raymond Torres, from Funcas.

“The marked weakness of investment and the poor performance of productivity […] “They will have a negative impact on the future rate of progress of the activity,” commented Pablo Hernández de Cos this Tuesday in Congress. Although, on the other hand, he highlighted that “the projections are particularly conditioned by the pace of execution of the Next Generation EU program.” [el Plan de Recuperación]whose momentum is expected to gain traction in 2024 and 2025.”

“Spain has been a pioneer in the deployment of the Recovery Plan in the European Union and is one of the most advanced countries in the execution of investments and reforms,” boasts, for its part, the coalition Government in updating its macroeconomic picture. , which he sent to the European Commission in the late hours of April 30, speeding up the deadline.