Spain’s economy expanded by 0.6% in the third quarter, almost matching the previous quarter’s performance and outperforming the other major European economies. The result came despite the prolonged crisis in the Middle East, although signs of a slowdown and persistent inflation are clouding the outlook.
Public consumption and tourism together accounted for exactly half of the quarter’s growth. Both sources of momentum face constraints. Sustaining such a rapid increase in public current spending without higher revenues could widen the deficit and increase reliance on increasingly cautious financial markets.
Tourism is also encountering growing saturation. Infrastructure pressures are among the main concerns, particularly after years of insufficient maintenance. The electricity blackout last year and serious incidents affecting rail transport are cited as evidence of these weaknesses.
Inflation remains another major obstacle. Consumer prices rose by 4.9% in October according to the preliminary figure, despite expectations that tax reductions on energy would help ease price pressures. Services inflation exceeded 4%, suggesting that returning to the 2% target will take time. Export-oriented businesses are being forced to compress their margins, while companies less exposed to competition can raise theirs.
The expansion will need new sources of support if public spending and tourism moderate. Private consumption is unlikely to fill the gap easily because inflation has reduced households’ purchasing power. Families have so far absorbed higher grocery costs by drawing on their savings, but that strategy cannot continue indefinitely. Productive investment is developing broadly as expected, supported by the remaining European funds, which are temporary. Construction investment appears stronger, provided it is not held back by bottlenecks or supply shortages.
The current cycle has diversified Spain’s growth base through the expansion of non-tourism services. Productivity has also improved, rising at an annual rate of close to 0.5%, between one and two tenths higher than before the pandemic. However, the underlying model remains largely dependent on adding workers, alongside very low wages. That reliance on a growing labour force is increasingly difficult to reconcile with the shortage of affordable housing.
Employment data from the third quarter provide an additional warning. Total employment continued to rise, but public-sector hiring contrasted with a decline in private-sector employment, the first such occurrence since the pandemic. All net employment created during the period was attributable to foreign nationals and people with dual nationality, while employment among Spanish nationals fell by nearly 150,000 people over the quarter.
The strength of the economy therefore represents an opportunity to contain inflation and reduce imbalances, rather than a guarantee that the expansion can continue unchanged. The slowdown in job creation reported by the Labour Force Survey is one of the clearest indications that the cycle is beginning to cool.
Sources: El País Economía.