Last update (15/11/2023)
Following strong real GDP growth this year of 2.4%, economic activity is expected to slow down in 2024 to 1.7%. Headline inflation is projected to keep moderating over the forecast horizon, although upside risks persist. Based on unchanged policies, the general government deficit is set to remain slightly above 3% of GDP in 2024 despite the phasing out of measures to mitigate the impact of high energy prices. The debt-to-GDP ratio is projected to gradually decrease in 2023, driven by strong nominal GDP growth, and then stabilise at 106.5% in 2024 and 2025.
|GDP growth (%, yoy)||2,4||1,7||2,0|
|Inflation (%, yoy)||3,6||3,4||2,1|
|General government balance (% of GDP)||-4,1||-3,2||-3,4|
|Gross public debt (% of GDP)||107,5||106,5||106,5|
|Current account balance (% of GDP)||1,9||1,7||1,5|
Economic activity expected to moderate
Real GDP recorded an expansion of 0.6% in the first quarter and 0.4% in the second quarter of 2023, driven by external demand and domestic demand, respectively. Preliminary data for the third quarter point to a slight slowdown (0.3% q-o-q), in line with the deceleration of growth expected in the second half of the year. This is attributable to sluggish dynamics of external demand due to the fading impetus of the tourism sector and the weaker economic situation in Spain’s main trading partners. On the domestic front, the expected downturn in real estate activity amid the high interest rate environment is set to negatively weigh on investment growth. In addition, a projected moderation in employment growth is set to limit the dynamism of consumption towards the end of the year, despite some real income gains for households.
Overall, economic activity is projected to expand by 2.4% in 2023, benefiting also from a strong carry-over from 2022 and a marked improvement in the terms of trade. Domestic demand is set to be the key driver of growth in 2024, upheld by further real income gains for households and the continued easing of price pressures. In addition, the broadening implementation of the RRP and the accelerating disbursement to final beneficiaries are expected to contribute to sustaining investment, notably in machinery and equipment. As a result, GDP is forecast to expand by 1.7% in 2024, before accelerating slightly to 2.0% in 2025, when the impact of the recently approved RRF loan component would provide further stimulus to growth-enhancing spending.
Downside risks relate to the prolonged impact on demand of the tightening of financial conditions, notably in light of the elevated, albeit declining, level of external, public and private debt. On the other hand, increasing households’ purchasing power, as well as the healthy financial situation of households and non-financial corporations thanks to the lower leverage and the liquidity accumulated in recent years, could mitigate the headwinds on consumption and investment.
Labour market resilience and declining unemployment
Sustained job creation and the reduction in the share of temporary employees in the private sector underpin the resilience of the labour market in 2023, despite the slowdown in employment growth observed since the summer. The unemployment rate is set to drop to 12.1% in 2023, and to continue improving over the forecast horizon, to 11.6% and 11.1% in 2024 and 2025, respectively. The pick-up in wages is expected to be moderate and aligned to the thresholds set out in the multi-year agreement signed last May, which should not significantly affect cost-competitiveness.
Headline inflation to decelerate gradually
HICP inflation is expected to reduce to 3.6% in 2023, driven by the continued moderation of the energy component. Underlying price pressures started to show signs of easing only as of the third quarter. As a result, HICP inflation excluding energy and food is set to moderate more gradually over the forecast horizon. A further slowdown of HICP inflation to 3.4% is projected for next year despite the upward pressure exerted by the expected phasing out of government measures implemented in the past years to mitigate the impact of high energy prices. In 2025, HICP inflation is set to average 2.1%.
The declining cost of energy measures drives deficit reduction in 2023 and 2024.
The general government deficit in 2023 is projected to decline, but more gradually than in 2021-2022. After displaying a buoyant growth over several quarters, tax revenues are showing signs of moderation, despite the robustness of personal income tax revenues. The main driver of the projected moderation in 2023 is the lower-than-expected growth of indirect tax revenues, reflecting the deceleration in inflation of imported goods. On the expenditure side, the growing cost of pensions, driven by the indexation to inflation, and intermediate consumption are driving the current expenditure increase. Additionally, the government approved two further packages of measures in May and June (with an expected combined cost of EUR 2.7 billion, or 0.2% of GDP) to mitigate the impact of high energy prices, including, among others, an extension of the VAT reduction for basic food and direct support to the road and maritime transport sectors. In 2023, the estimated net budgetary cost of these measures is expected to decline by 0.6pps. to 0.9% of GDP. All energy-related measures (except the levy on energy companies) are expected to expire by 31 December 2023. Overall, the headline deficit is expected to narrow to 4.1% of GDP in 2023.
The deficit is expected to keep declining in 2024 to 3.2% of GDP, based on unchanged policies, as the budget for next year is yet to be put forward. Savings from the phasing out of energy-related measures are set to be the main driver of the deficit reduction in 2024. The budgetary impact of revenue measures such as the levy on financial institutions or the solidarity wealth tax is expected to expire by the end of 2024. The deficit in 2025 is projected to slightly increase to 3.4%. The debt-to-GDP ratio is projected to continue its declining path in 2023, decreasing to 107.5% and then stabilise in 2024-2025 at 106.5%, as the favourable differential between nominal GDP growth and the cost of servicing debt fades.