GDP will grow by 3.0% in 2024, 2.3% in 2025 and 2.0% in 2026. Domestic demand will underpin growth, with private consumption expanding on the back of a resilient labour market, higher household savings and real income gains. Investment will recover supported by lower financing costs and the implementation of the Recovery, Transformation and Resilience Plan (RTRP). Headline inflation is projected to fall to 2.8% in 2024, 2.1% in 2025 and 2% in 2026. The main downside risks are heightened geopolitical tensions that could increase energy prices and worsen demand from Spain’s main trading partners, and a slow implementation of the RTRP.

Effective implementation of the fiscal consolidation plan is crucial to adhere to European fiscal rules, place public debt on a downward trajectory and free up resources for future spending priorities. Enhancing labour matching efficiency and addressing skill mismatches would help ease structural unemployment and boost productivity growth.

GDP rose by 0.8% (non-annualised) in the third quarter of 2024, exceeding expectations, driven by robust public and private consumption, the latter supported by rising employment and real wages. Although consumer confidence has improved, it remains below pre-pandemic levels. Investment decreased in the third quarter, mostly due to machinery and equipment. Short-term indicators, such as the manufacturing purchasing managers index (PMI) and social security registrations, expanded in October 2024. The floods that took place in October 2024 caused human and physical capital losses, primarily in the Valencia region. Employment increased by 1.7% year-on-year as of the third quarter of 2024, while the unemployment rate dropped to 11.2% in the same quarter, with labour shortages in the public administration, defence, education, and health sectors. Meanwhile, credit to households for housing and credit to firms declined by 0.7% and 0.6%, respectively, year-on-year as of September 2024. Inflation trends have been favourable, with headline inflation falling to 1.8% in October due mainly to lower prices for food, fuel, and electricity, while core inflation declined to 2.5% in October 2024, despite persistent price pressures in services.

Export volumes increased by 2% year-on-year in September 2024, driven by growth in tourism and other service exports. The trade deficit narrowed in September 2024, primarily due to higher energy export revenues and a reduction in energy imports.

The budget deficit is expected to decline gradually to 3% of GDP in 2024, 2.5% in 2025 and 2.1% in 2026, with projected cumulative consolidation of 0.7% of GDP over 2025 and 2026, in line with the government’s medium-term fiscal plan. To support households, the government has partially extended the VAT rebate on certain essential food items through the end of 2024, while also expanding unemployment support by increasing its coverage and raising the monthly benefit amount. The projections assume that government spending growth will be restrained, affecting current expenditures and capital transfers, while the anti-inflationary measures introduced in 2022 will conclude in 2024. The government announced an aid package for flood-affected areas of around 1.1% of GDP, of which 30% are guarantees. The impact on the fiscal deficit is uncertain as it will depend on the extent of the requested aid and the timing of disbursements.

GDP growth is projected to be 3.0% in 2024, 2.3% in 2025 and 2.0% in 2026. Growth will be primarily driven by consumption, supported by a resilient labour market, real income gains and accumulated household savings. Investment will strengthen, fuelled by lower financing costs and implementation of the RTRP, although fiscal policy will provide less of a boost to the economy. While exports will benefit from positive trends in tourism, the recovery of imports will limit the contribution of net exports to growth. Inflation is projected to decline steadily through to 2026, aided by lower energy and food prices and limited wage pressures.

While the budget deficit and the public debt-to-GDP ratio have declined, fiscal consolidation remains vital for maintaining a downward trajectory in debt, adhering to the new EU fiscal rules and accommodating spending priorities, such as those related to an ageing population. Gradually broadening the value added tax base, increasing environmental taxes and enhancing the efficiency of public spending would support consolidation efforts and create space for growth-enhancing spending. Many employers report difficulties in finding candidates with the necessary skills for available jobs, contributing to unemployment and underemployment, where individuals are employed in positions that do not utilise their skills fully. To further reduce unemployment and strengthen productivity, it is essential to align educational programmes with labour market demands, improve job search assistance and offer career guidance, alongside up-skilling and re-skilling support.