The Spanish economy is holding up better than expected against the impact of inflation.
The Spanish National Institute of Statistics reported quarterly gross domestic product growth of 0.5% for the first quarter of 2023, based on advance data released 28 April.
Oxford Economics revised the Spanish real GDP growth estimate for 2023 upwards to 1.8% since the beginning of the year and it is now outperforming the eurozone average by 1.05 percentage points.
Spain has been the top-performing country in the eurozone in terms of the composite PMI after rising to 58.2 in March, the quickest pace in 16 months, while inflation has moderated respect to 2022 and the labour market remains resilient.
The latest trends in the Spanish labour market are still positive as employment is already above pre-pandemic levels and it continues to grow despite the difficult environment.
According to Social Security enrollment figures, in the first quarter of the year, all sectors have created employment, with services being the main driver and construction leading the annual employment growth.
Employment is forecast to continue to rise at a rate of 1.1% in 2023 and 1.6% in 2024, according to Oxford Economics.
Economic growth this year is set to be mainly driven by the domestic sector while public investment should be boosted by the Next Generation EU funds.
Several factors cloud the economic outlook, like the persistence of core inflation and its potential impact on consumption once household excess savings accumulated during the pandemic have been depleted.
Core inflation slightly moderated in April, according to provisional data published by INE, but continues to reach record highs, ending up at 6.6% in April. Inflation excluding energy and food is expected to average 5% this year and to moderate to 3% in 2024.
Vulnerability also arises from the tightening of the monetary policy with the European Central Bank expected to continue to raise the cost of financing, though at a slower pace, to at least 4% by the end of the year.
In line with the monetary policy intervention rates, the one-year Euribor is expected to peak in the second half of this year at 4.25% while the Spanish 10-year government bond is projected at 3.2% at the end of this year.
Higher interest rates weigh on the real estate market and the effects are already tangible. Home sales registered in January and February are only 0.1% lower than last year, but home sales drop accelerate in February by 6.6% year-on-year.
Spain is in a relatively strong position within Europe but the current environment calls for caution.