The Spanish economy stands out for its «resilience» in recent months, as pointed out Almudena Benedit, responsible for portfolio management at Julius Baer for Iberia, although this does not exempt her from facing a «notable risk» derived from «political uncertainty», which has intensified in recent months.
«Spain's political risk has remained high since the last general election, given its increasingly polarized political landscape, as reflected in the recent event of the near resignation of the Prime Minister, Pedro Sánchez. This could pose a notable risk to fiscal easing and debt reduction agendas.«, he assures. The political situation collides with «resilience» in economic matters, despite «the high rates and the certain pessimism that hangs over the market prospects of the European economies.
In this context, Benedit is relatively optimistic about the prospects for the Spanish economy, since «debt remains relatively sustainable, private balance sheets remain strong and EU funds continue to support private investment growth«. However, he clarifies, «the Spanish economy is significantly limited by persistently high levels of unemployment and by political risk and uncertainty.» So far this year, Spain has been one of the countries with the highest economic growth within of the EU, although there are now concerns that this momentum from the first half of the course could fade as household spending is deflated.
«Spain's GDP strengthened by 0.7% quarter-on-quarter in the first quarter of 2024 as well as in the fourth quarter of 2023 (+0.5% quarter-on-quarter versus the third quarter of 2023), above most of its peers Europeans. Despite this, Domestic household consumption continues to weaken, due to the slowdown in wage growthwhile investments are recovering in 2024, after a weak second half of 2023, given the strict financing conditions», he values. Meanwhile, the situation of the trade balance continues to improve, since «exports, which reported weaker during the second and third quarters of 2023, «recovered as increases in exports outpaced the pace of imports.»
«Overall, real GDP growth stood at 2.5% YoY in 2023 (up from +5.8% YoY in 2022) and we expect this pace to slow further to 2.2% YoY in 2024 ( compared to the projected eurozone growth of 0.6% year-on-year). The delayed impact of interest rate increases is likely to continue to weigh on domestic demand, given still high levels of debt/GDP.«, Benedit predicts.
IMPROVE THE DEFICIT
One of the pending subjects of the Spanish Government is to improve the fiscal deficit, after closing last year at 3.6%. In this sense, the Executive has the delicate task of balancing its expenses and income while maintaining aid policies in various areas. «In December 2023, the Government expanded and revised the economic reforms it had previously implemented and which were due to expire in December 2023. In particular, The zero rate of VAT on basic foodstuffs was extended until the end of June 2024, while the reduced rate of 5% on the prices of natural gas and electricity was raised again to 10%,» he says. Now, The IMF expects Spain's fiscal deficit to be reduced to 3.1% of GDP in 2024, supported by «upward revisions to VAT rates on energy (energy subsidies accounted for approximately 1.4% of GDP in 2023).» «Given the narrowing deficit, the IMF expects the Spain's debt will gradually decrease to 106.3% of GDP in 2024 (compared to 107.5% in 2023)», Add. It is worth remembering that this week the European Commission removed Spain from the excessive deficit procedure, considering that the failure to comply with the threshold set at 3% is «temporary.» The country closed 2023 with a deficit of 3.6%, but Brussels believes that the Spanish deficit will decrease to 3% at the end of 2024, with which «the Commission will not propose in July to open an excessive deficit procedure for Spain.» Regarding inflation, the analyst highlights that «Prices have been in line with expected figures in recent months«, and for the remainder of the year he anticipates continued moderation. «We expect a annual average for inflation to be reduced to 3% in 2024 (compared to 3.4% in 2023)mainly due to monetary conditions, which remain restrictive despite the fact that the ECB has begun to cut interest rates,» he says.