The Spanish economy performed well in the second quarter of 2023. GDP grew by 0.4% quarter-on-quarter and 1.8% year-on-year according to the advanced data published by the Instituto Nacional de Estadística on Friday. As a result, GDP now is 0.4% above the pre-pandemic level of the second quarter of 2019.
GDP growth was boosted by healthy domestic demand. Private consumption broke the contraction trend of contraction of the last two quarters and rose by 1.6% compared with last quarter on the back on inflation moderating. It stabilised at around 2% in July.
The recovery in private consumption is consistent with strong underlying employment trends. Total employment increased by 603,900 people in the second quarter to over 21 million people,the largest quarterly increase on record. In seasonally adjusted terms, employment grew by 1.4% quarter-on-quarter compared with 1.2% in the first quarter. This is the highest rate since the end of the pandemic lockdowns.
The increase in permanent contracts stands out, but the temporary employment rate has also stabilised, at a historical low of 17.3%. As a result, unemployment fell by 365,000 people down to 2.76 million, the lowest since 2008. The unemployment rate came in at 11.6%, a steep fall from the 13.3% reported in the previous quarter.
Healthy employment is supporting private consumption as retail sales keeps growing. The latest retail sales index (at constant price and seasonally adjusted) published by INE points to a monthly growth of 0.3% which translates into a 6.4% on an annual basis.
Investment also grew strongly, by 4.6% quarter-on-quarter thanks to a boost from construction which increased by 7.3%. The latter increase is largely explained by investment in non-residential construction, which rose by 13% while residential investment rose by 2.3%. Finally, public consumption rebounded by 1.5%, after falling by 1.6% in the previous quarter.
On the other hand, external demand weakened after the previous good quarter. In the second quarter exports fell by 4.1%, more than imports which fell by 1%. The fall in exports is explained by goods, which contracted by 5.9%, while services only fell by a modest 0.3%. Tourism services, though, did increase by 1.5%.
Overall, domestic demand contributed 1.5 percentage points to annual GDP growth in the second quarter of 2023, while external demand contributed 0.3 percentage points.
Looking ahead, the Spanish economy is forecast to grow by 2.5% for the full year, outperforming the eurozone average by 1.84 percentage points, according to Oxford Economics.
However, high interest rates, a weak external demand environment and the political uncertainty after the general elections on 23 July could weigh on growth in the second half. Spain’s two main parties, the centre-right Partido Popular and the centre-left party PSOE have failed to secure the absolute majority. While both parties are trying to put together new governments, another general election remains a possibility.
Political uncertainty and instability add additional risks to the current delicate environment and could reduce investment and the pace of economic development.