Despite severe weather conditions this autumn, the Spanish economy has grown more than expected. These strong figures are expected to continue into next year, although a slight slowdown is anticipated afterward.

According to the latest forecast from Banco de España, the Spanish central bank, the country's economy will grow by 3.1% this year. This is 0.3 percentage points higher than the previous estimate released three months ago and 0.4 percentage points above the government's projections. This growth rate is four times higher than the average among EMU countries, driven by stronger-than-expected activity in both the private and public sectors.

Resilience Amidst Natural Disasters

This growth has been achieved despite devastating storms that caused significant human suffering and required unplanned public aid payouts. These emergency measures have increased the public deficit but have had a relatively small impact on the macroeconomic level, according to Banco de España.

Political Uncertainty and Investment Hesitation

One area of concern is relatively low business investment. Ángel Gavilán, Banco de España's Head of Statistics, notes uncertainty about why investments have not grown more, despite access to European funds. One hypothesis is that uncertainty surrounding the government's economic policies has made Spanish businesses more cautious compared to their counterparts in other countries. Rising interest rates over the past two years may have also played a role, though these rates are now beginning to ease.

Inflation Moderation Surprises Economists

Economists at the central bank were surprised by the sharp moderation in inflation during the second half of this year. Inflation is projected to average 2.9% for 2024, half a percentage point lower than last year. It is expected to remain low in 2025 (2.1%) and 2026 (1.7%). However, inflation may rise again in 2027 due to the EU's new emissions trading system. Banco de España cautions that there is still "extraordinary uncertainty" surrounding the impact of this policy.

Discrepancies in Deficit Projections

The central bank forecasts a public deficit of 3.4% for this year, 0.4 percentage points higher than the government's estimate. This difference is primarily attributed to the costs of responding to the autumn storms.

There is also a notable discrepancy in projections for next year. While Prime Minister Pedro Sánchez has promised the EU a deficit of 2.5% of GDP, Banco de España expects it to be closer to 2.9%. By 2026, the gap widens further, with the government forecasting 2.1% and the central bank estimating 2.7%.

Gavilán suggests that the EU may exclude parts of this year's deficit due to its temporary nature as a response to the storms, though this cannot be guaranteed.

Growth Prospects for 2025

Looking ahead to 2025, the central bank has revised its growth forecast upward by 0.3 percentage points to 2.5%, slightly above the government's prediction of 2.4%.

However, this high growth is expected to taper off in the coming years, particularly as the inflow of foreign funds into the Spanish economy reaches its limit. Tourism, which surprised analysts by continuing to grow in 2024 due to pent-up demand after the pandemic and shifting travel patterns, is likely to slow down.

"Tourism will remain a key driver of Spain's GDP and will not decline, but it will no longer contribute to growth at the same pace," Gavilán explains.

Conclusion

Despite challenges from natural disasters and political uncertainties, Spain's economy has shown remarkable resilience in 2024, with strong growth and inflation under control. However, maintaining this momentum may prove difficult as external factors like tourism and foreign investment begin to plateau.