Loading
“Spain isbecoming AI BBVAGDPEUYour browser does not support the element. a global reference point for prosperity,” boasted Pedro Sánchez, the country’s prime minister, at a congress of his Socialist Party in Seville on December 1st. While Europe’s other large economies are plunged in gloom, Spain’s is soaring. It is set to grow 3% this year (see chart 1), almost four times the euro-area average. Hit harder than most by the pandemic, it now boasts 1.8m more jobs than at the end of 2019. Investors have noticed: with faster growth and a lower fiscal deficit than France, Spain has seen its bond yields dip below those of its northern neighbour for the first time since 2007.With packed restaurants and throngs of shoppers, Madrid is enjoying a palpable pre-Christmas buzz. But how long can the good times last? Forecasters expect Spain to outpace its peers for at least the next two years, helped in part by large dollops of Next Generation funds, the European Union’s post-pandemic aid scheme. The country is the biggest beneficiary of these after Italy. Much of the expansion has been driven by immigration, tourism and public spending, which may all eventually tail off. But some of the growth comes from non-tourist service exports, by companies ranging from tech firms to engineering consultants. And that bodes well.Take Smartick, an educational software company based in Pozuelo, a well-heeled suburb of Madrid. It uses big data and to provide pupils with individualised learning materials in maths, reading and coding. Founded in 2009 by Javier Arroyo and a fellow management consultant, it is poised for growth. Mr Arroyo expects to double the firm’s €10m ($10.5m) of annual sales in three years, with most of the expansion coming from abroad. “There’s now a startup culture that wasn’t there five or ten years ago,” Mr Arroyo says. “Spain is starting to figure in the digital world.”During the pandemic, non-tourism service exports overtook tourism revenues for the first time. But the travel sector is booming too, with over 90m visitors expected this year, a record. That has produced outbreaks of tourism phobia among locals.The tourism boom is also one of the reasons for immigration: a quarter of those who work in hospitality are foreign-born. Spain’s population has increased by 1.5m in the past three years (to 48.9m), with nearly all the increase due to immigration (see chart 2). Latin Americans, with the same language and a similar culture, make up 70% of the recent arrivals, which has reduced friction. Whether immigration can continue at this pace depends in part on the availability of housing. “It’s a bigger bottleneck than ever,” says Rafael Domenech of , a bank.But with around 90% of the new jobs going to immigrants, income per person has barely grown. That explains a paradox: “The macroeconomic picture is extraordinary but the social perception of it is not,” says Raymond Torres of Funcas, a think-tank. Although the inflation triggered by Russia’s invasion of Ukraine has subsided, in real terms the income of a family who stayed in the same jobs is slightly below that of 2019. Only in the past year or so have average real wages started to rise. Officials point out that thanks to Mr Sánchez’s big increases in the minimum wage, the incomes of poorer Spaniards have risen faster than the average.Worryingly, investment by the private sector lags behind the rest of the economy. It is still below its 2019 level. Until the pandemic interrupted it, Spain’s economy was growing at a respectable 3% or so a year between 2015 and 2019 and adding jobs faster than in the past. This owed much to reforms of the financial system and the labour market pushed through by the previous conservative government during the great recession. “Spain is still living from that,” says Iñigo Fernández de Mesa of the employers’ association.A second labour reform in 2021, under Mr Sánchez, preserved labour flexibility and added a crackdown on the abuse of temporary contracts. But business leaders blame the slowdown in investment on more recent government policies. They complain especially of constant tinkering with labour rules and a relentless rise in taxes. As a result, “businesses are on hold, waiting,” says Juan María Nin of the Circulo de Empresarios, a business think-tank.Since an election last year, Mr Sánchez’s minority government has had to accommodate the conflicting demands of half a dozen leftist and nationalist parties which sustain it in parliament. Amid chaotic parliamentary scenes last month, it managed to get approval for tax rises worth €4.5bn (0.3% of ). They include an extension for three years of an emergency tax on the interest and fee income of banks, initially brought in as a temporary measure when interest rates rose in 2022. Bankers grumble that this involves double taxation and will force banks to become more cautious in granting credit.Officials note that banks and businesses are making healthy profits. The bank tax “has generated revenues to finance the social safety-net”, says Carlos Cuerpo, the economy minister. He says he expects investment and private consumption to be the main motor of growth from now on. The tax rises will also help the government meet its policy of gradually reducing the fiscal deficit and thus secure the next tranche of aid. “We think a soft landing is possible,” says Mr Cuerpo. That may well be true for the public finances. The proof of the Spanish model more broadly now lies in the rate of investment.
