Over the past decade, putting aside the Covid-19 recession, Spain’s economy has performed better than the European average. 2024 looks set to be no exception; Spain’s GDP is expected to increase at double the eurozone average: between 1.9% and 2.1%, according to various estimates, compared with a range of 0.8% to 1% for peers. And this will likely remain true in 2025.
“Things are going great, but the engines of growth have been exhausted.” says Miguel Cardoso, chief economist for Spain at BBVA Research.
The generous fiscal policy that has helped support economic growth is expected to soon become more restrictive. Productivity growth remains anemic and labor costs in Spain are rising faster than elsewhere in the region. The shortage of affordable homes only compounds the strain caused by higher inflation and welfare costs. from Spain’s European neighbors.
Strong bank, weak lending
Reforms that followed the 2008-2009 financial crisis strengthened the banking system, spurring a flurry of takeovers that sharply reduced the number of institutions and made the industry more stable, says Juan Dolado, an economics professor at the Carlos III University of Greater Madrid. Metropolitan area. After a decade of restructuring, Spanish banks are posting record profits.
“The problem now is that they have extra profits,” says Dolado, noting the controversial 4.8% tax the government has imposed on interest and fee earnings at Spain’s largest banks.
In May, Banco Bilbao Vizcaya Argentaria (BBVA) announced a €12.23 billion hostile bid against smaller rival Banco de Sabadell. The goal is to create a lender with more than 100 clients and assets worth more than €1 trillion, second only to Santander in Spain. Following a sweeping consolidation that saw the number of Spanish lenders cut to 10 from 55 before the 2007-08 global financial crisis, the Spanish government opposed the deal, saying the merger could harm customers and jobs.
Although banks are more resilient today, private lending remains subdued, with limited demand amid low levels of private investment.
“We ourselves are struggling to understand the weakness in investment,” says Oriol Carrera Baquer, senior economist at Caixabank, although that could change with lower interest rates and manufacturing growth across Europe.
“Firms have delayed investment decisions,” says Francisco Quintana, director of investment strategy at ING in Madrid, and lower rates could prompt them to take that step in the coming months. Another factor is the €120 billion in EU recovery funds that Spain is expected to receive.
“In total, Spain will receive 10% of its GDP, and implementation is halfway there, with a likely acceleration this year and next,” Quintana says.
Rearranging the export mix
More fundamental changes are highlighted by Spain’s transition from a traditionally negative current account thanks to energy imports, as well as a positive trend driven by tourism (about 15% of GDP) and new export categories including cars and services.
BBVAs Cardoso notes that services such as IT, translation and consulting are gaining a greater presence, suggesting Spain’s export surge is less dependent than before on the whims of its European neighbors.
“We don’t know much about where our services exports are going,” says Cardoso. “We know that a significant portion goes to Europe, but a little more goes to the US and Latin America. This may be related to Spanish firms providing services to their subsidiaries, but it may also be related to high value-added services that are produced in the United States. Given the appreciation of the dollar against the euro and higher wage growth, it has become more profitable to produce these services from Spain.”
The outlook for investment banking is also bright, some close observers say. Despite the decline in overall deal values, the mergers and acquisitions market in Spain remained relatively strong last year, according to Barcelona law firm Cuatrecasas.
Cuatrecasas expects a slight increase in M&A activity in 2024, provided interest rates stabilize, the gap between sellers’ and buyers’ valuations of target companies narrows, and banks retain “significant amounts of dry powder.”
“Strategic sectors will remain dominant,” predicted a recent Cuatrecasas report. “Investors will continue to select and be active in strategic sectors, especially the technology and energy sectors (likely with a focus on renewables).”
Renewable energy is the “crown jewel”, says ING’s Quintana, and the deal list for 2023 is extensive. Canadian asset manager Brookfield has bought the 50% of Spanish renewable energy company X-elio it did not previously own from US buyout fund KKR for €1.8 billion. French fund Antin has submitted an €866 million bid to buy Opdenergy. Amazon reported new investments in renewable energy worth €670 million, and Spanish utility Iberdrola sold a 49% stake in its 1,200 megawatt green energy portfolio to Norges Bank for €600 million.
Political uncertainty
The EU’s budget requirements for member states are still being discussed, but Spain, which had a deficit of around 3.6% of GDP in 2023, is expected to tighten its government spending.
Some economists promote structural reforms aimed at boosting the country’s productivity, for example by improving education levels and creating a less fragmented labor market. But political uncertainty remains a pressing issue.
In the latest display of instability in Madrid, Prime Minister Pedro Sanchez announced he would resign last month, but then, after five days of street demonstrations and pledges of support from political allies, he announced he would remain in office. Behind this drama lies a certain political paralysis that some observers find even more troubling.
“But I don’t think [Sanchez’s about-face] is really important for economic development,” says Caixabank’s Carrera. “Right now our parliament is very divided and polarized. This means it is difficult to advance meaningful structural reforms. And this is the main point”.