Spain’s economy is emerging as a bright spot in Europe
Spain’s Gross Domestic Product (GDP) is expected to grow at 2.3% in 2023, according to Bank of Spain. The first two quarters of 2023 have also shown a positive trend with the GDP growing by 0.6% and 0.5% respectively as compared to Quarter-on-Quarter results for the last year.
The International Monetary Fund (IMF) is more optimistic than Bank of Spain about Spain’s GDP growth. The IMF is expecting the Spanish economy to grow at 2.5% in 2023. Although the growth is expected to slow down marginally next year Spain would still continue to be among the leading economies in Europe.
Spain’s GDP growth is propelled with the tourism regaining its position as a major contributor to the Spanish economy. At present tourism contributes around 12% to Spain’s economy. In the pre-pandemic period tourism accounted for 15% of Spain’s GDP. While it could take some time to reach the pre-pandemic levels, the past three years have witnessed a surge in tourism.
After tourism sector opened with the end in travel restrictions, the years 2021, 2022 and 2023 have seen a spectacular growth. In 2021, 31.2 million tourists visited Spain. This number rose by 130% in 2022 when 71.6 million people travelled to Spain. In 2023 Spain is expected to welcome around 80.7 million tourists. Majority of the tourists to Spain are from European countries France, Germany, the UK and Italy. These travellers are visiting Spain despite their respective countries are under economic strain and they have limited disposable income at present. 2024 could see Spain’s tourism sector reaching the pre-pandemic levels.
A series of challenges
Spain’s economic recovery is coming on the back of two major challenges in the last 4 years – the COVID-19 pandemic and the Russia-Ukraine war.
The COVID-19 pandemic hit Spain badly as it affected tourism, one of the principal contributors to the Spanish economy. Tourism saw a sharp drop from 83.7 million tourists in 2019 to below 20 million in 2020. The contribution to the GDP fell to 4% from the usual more than 12%. The economic woes compounded with Spain’s fiscal deficit rising to 10.97% in 2020 (much above the EU threshold of 3%), unemployment reaching 16.2% and public debt to 120%.
The Russia-Ukraine war further complicated the economic recovery process as Spain battled inflation and energy crisis.
The headline inflation (consumer price index) had started to rise from 2021 and was exacerbated by the Russia-Ukraine war. The inflation which was 6.5% in December 2021 rose to 7.6% in February 2022 and further climbed up to 8.7% in May 2022. However, rapid economic recovery has resulted in the IMF projecting the inflation in Spain to be around 4.3% in 2023.
Also almost the entire Europe faced energy crisis as a result of the Russia-Ukraine war. With more than 60% of Europe’s energy supply coming from Russia, the European countries faced an uphill task of cutting down their energy purchases while also battling economic crisis.
For its part, Spain tackled this crisis through an energy-saving plan adopted by the Spanish parliament. This plan, in-line with the agreement reached by the EU energy ministers on September 30, 2022, called for a voluntary reduction of gross electricity consumption by 10% and mandatory reduction by 5% during peak hours. While showing solidarity with the EU, Spain sought to reduce dependence on the Russian gas by two-thirds in 2022 and end reliance on all Russian energy supplies before 2030.
Spain backed these energy-saving initiatives with putting a cap on the gas prices and giving tax breaks so as to keep inflation in check and to shield its citizens from the economic hardships as much as possible.
What does strong economic performance mean for Spain?
Strong economic performance in the post-pandemic period would not only enhance Spain’s standing in Europe but also at the global level. It is not for the first time that Spain has performed better economically than other European countries. Spain was in a similar position between 2006 and 2008, prior to the global economic crisis that started in 2008 and lasted until 2013. At that time Spain was unable to leverage its strong position. Instead the economic slowdown hit it badly and the Spanish economy became one of the most fragile economies in Europe in 2011. However, Spain should now take advantage and emerge as a major power to make its presence felt in the world affairs.
At present, Spain has shown steady economic progress where even France and Germany, the two traditional powerhouses of Europe, have had a hard time in maintain their leading position.
Spain’s economic engagements, concomitant to its foreign policy, have mostly been restricted to Europe, North Africa and Latin America. The only exception to this is China with which Spain enjoys close ties outside of its traditional sphere of economic and foreign engagements.
Just as the year 2023 has started on an encouraging note for Spain, the Bank of Spain has predicted similar growth trajectory for the next two years as well. Spain’s GDP is poised to grow at 2.2% in 2024 and at 2.1% in 2025.
The IMF’s projections are also parallel to those by the Bank of Spain. The IMF expects Spain be in the leading position among the advanced European economies. The GDP growth projections for 2024, according to the IMF are Spain 2.0%, France 1.3%, Germany 1.3% and Italy 0.9%.
After struggling for years due to economic and non-economic reasons, Spain is emerging as a bright spot in Europe. Strengthening economy should propel Spain to assert its position in the global order which it has not been able to do until now.
Niranjan Marjani is an Independent Political Analyst and Researcher.