The growth slows down, despite the boost from the external sector.

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Global economic activity showed greater dynamism at the beginning of the year 2023, thanks to the dissipation of several bottlenecks that limited its progress during the previous year, mainly tensions in global value chains and the sharp increase in energy prices. However, in the second quarter of this year, its progress has slowed down, especially in Europe. Meanwhile, inflation has peaked in many parts of the world, although non-energy prices continue to rise. As a result, major central banks continue to tighten their monetary policies, though recently at a slower pace.

Consequently, the growth forecasts for the global economy in 2023 still point to a clear deceleration compared to 2022, although its performance is better than initially estimated. Moreover, these forecasts remain subject to a high level of uncertainty related, among other factors, to the persistence of inflation over time and the potential measures by monetary and fiscal authorities to address it, as well as the effects of the ongoing interest rate hikes on growth.

The global economy is also undergoing major transformations that present both challenges and opportunities. These include geopolitical changes and their impact on international trade and investment flows, leading to a slowdown in globalization. Other transformations shaping the global economy include the fight against climate change and the energy transition, which generate significant economic activity and attract substantial investments. Additionally, the digital transformation and rapid adoption of technologies such as Artificial Intelligence have a significant impact. The increased role of the State in the economy, with governments intervening not only through high public spending but also through intense regulatory activities in many areas. Lastly, the aging population and its pressure on social security and public healthcare systems are also significant challenges.

In this context, in Europe, the eurozone’s economy is proving to be more resilient than expected. However, there is a significant divergence in economic growth between countries, with Germany facing a particularly challenging situation due to the energy status quo change and the war in Ukraine. These disparities are also reflected in the evolution of prices across different European countries, posing additional difficulties for the European Central Bank’s role.

Amid these challenges, other relevant risks for the European economy include the ongoing war in Ukraine and the energy crisis as major geopolitical risks, while economic risks include declining purchasing power of households and its impact on consumption, rising labor costs contributing to sustained inflationary pressures, labor shortages in certain sectors, and the effects of monetary policy tightening on the real estate market, especially in the Nordic countries.

In this international and European context, the Spanish economy accelerated its growth during the first quarter of 2023, finally recovering its pre-pandemic GDP levels. However, it became the last country in the eurozone to achieve this milestone, resulting in a significant temporal gap compared to the European average, as shown in chart 1. The Spanish economy continued to expand in the second quarter, although at a slower pace as the quarter progressed, with mixed signals, particularly less positive ones from the industrial sector. The labor market also showed robust growth in the first half of the year, but at a slower pace in recent weeks, partly due to an early start of the tourist season.




Source: Eurostat, Bank of Spain, Equipo Económico (Ee).


A notable positive factor has been the contribution of the external sector, which remains one of the main strengths of the Spanish economy. The external sector has sustained economic growth so far this year and has enabled significant financing capacity relative to the rest of the world, driven primarily by the dynamism of the tourism sector, as shown in chart 2. However, there are reasonable doubts emerging about the impact of the complex European economic landscape on the Spanish external sector’s ability to continue driving the economy in the medium term.

On the negative side, the increase in financing costs has had an impact on domestic demand, especially on consumption, and has also affected the real estate market on the demand side. However, a sharp correction in the real estate market is not expected, as it has not accumulated significant imbalances in its structure and evolution in recent years. The financial sector is also in a different situation than the period prior to the 2008 real estate crisis and the weaknesses shown by some U.S. banking entities this year.

In this described context, and as seen in Table 1, at Equipo Económico (Ee) we foresee an economic growth slowdown, primarily due to lower contribution of household consumption compared to the previous year, despite the dynamism of the external sector. Nevertheless, we have revised our GDP growth forecasts for 2023 upward to 2.4%, largely due to the data revisions made by the Spanish National Statistics Institute (INE in Spanish). For 2024, we still estimate a GDP growth of 1.9%, which is slightly above its potential growth rate.




Source: INE for 2022. (*) Equipo Económico (Ee) forecast (Jul.-2023).


We expect inflationary pressures to remain high throughout the rest of 2023 and 2024, albeit with less intensity than in 2022. We project an average annual growth rate of the CPI of 3.7% in 2023 and 3.5% in 2024. Moreover, we expect the underlying inflation to grow above the general CPI in 2023. We anticipate that marked differences in price growth across sectors will persist, with the highest increases in 2023 occurring in food-related sectors.

We estimate that the labor market’s dynamism will be less intense in line with economic activity, with employment growth at around 1.9% in 2023 and 1.5% in 2024. Despite strong revenue growth, the public deficit is expected to reach 3.9% in 2023 due to elevated structural spending levels and the decision to engage in significant discretionary spending in recent times.

Currently, there is an intense debate about the sustainability of the Spanish economy’s growth and its potential growth rate and structural unemployment. The debate revolves around whether the impact of rising interest rates, combined with the complex international context, will lead to a gradual decline in growth, possibly even approaching negative territory. Alternatively, it is argued that the Spanish economy will maintain relative employment strength in the medium term, sustaining economic growth at a rate close to its potential, though with a still high level of unemployment. Our central scenario leans towards the latter option. However, even in this scenario, the growth rate would be insufficient to address the challenges and imbalances present in the Spanish economy, highlighting the need for a comprehensive set of reforms in the next legislative period.

Among the main macroeconomic imbalances that must be addressed in the short term is the high inflation rate, which is surpassing GDP growth. To tackle this issue, it is crucial to foster competition in markets and promote openness to international trade, rather than implementing supply-restrictive measures and price controls, as has been done in recent years. Another major imbalance in the Spanish economy is the lack of fiscal consolidation. It is essential to implement a credible medium to long-term fiscal consolidation plan that guarantees a feasible path for reducing public debt and achieving lower deficit levels, facilitating sustainable growth over time. In this regard, it is necessary to reinstate fiscal rules, including those for Autonomous Communities.

At a structural level, another significant problem in the Spanish economy is the stagnation of productivity, coupled with Spain having the highest unemployment rate (12.7% in May) in the entire EU (with an average of 5.9%). Despite this, many Spanish companies in various sectors report a lack of qualified labor. Both factors have resulted in stagnation in real per capita income. Therefore, urgent reforms are needed in the labor market to promote flexibility, a true boost to active employment policies, and a revision of the current unemployment protection systems to facilitate rapid reintegration of the unemployed.

Furthermore, the aging population exacerbates the productivity issue in Spain and presents a fundamental challenge for the Spanish economy: the sustainability of the pension system. A truly effective and long-term reform of the Spanish pension system will be necessary. Another significant transformation comes from the fight against the consequences of climate change and Spain’s energy dependence, highlighted during the energy crisis, which underscores the need to promote the energy transition. The substantial investment resulting from the European NGEU funds presents a great medium-term opportunity for the Spanish economy, but it will be essential to ensure greater execution and mobilization of these funds into the real economy.

The current context in Spain is marked by the outcome of the general elections held on July 23, which has left a complex and fragmented political landscape. None of the political parties on the left nor the right has managed to secure a parliamentary majority, leading to uncertainty regarding the formation of a stable government. This situation raises the possibility of a repeat elections, further increasing the uncertainty and complexity in addressing the structural challenges facing the Spanish economy.

The political uncertainty and the lack of a clear direction could impact investor and market confidence, potentially further slowing down the execution of European funds. Additionally, the absence of a government with the capacity to implement necessary reforms could hinder the necessary boost to economic activity to grow above its potential growth, and correct its main macroeconomic imbalances, such as inflation, public deficit, high public debt, and high unemployment rate, amongst others.


Jorge Vindel González. Analyst. Ee Economics.

Ayoub Borakruf. Analyst. Ee Economics.

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