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Spain’s Economy Surges in End of Year Good News Story
As we approach the end of the year, it’s time to focus on some welcome good news. Even nicer is that it is here in Spain. What I’m referring to are a raft of articles about Spain’s surprisingly strong economic growth in 2024.
One of those articles was in The Economist. It was actually one of several in the venerable magazine. The thrust of main article – “What Spain Can Teach the Rest of Europe” – is a bit typical of The Economist. It wants to only credit the conservative government of a decade ago for reforms that are supposedly now bearing fruit.
Of course, things do sometimes take a while to mature but it’s likely that Spain is, in many ways, facing some good luck because of both policies, long term economic trends, and even geography and weather. There’s enough good news to share it around.
But let’s dig into the details.
This year’s EU growth rate is expected to be just 0.9%, barely above a recession. Germany, once the EU’s economic engine, is suffering because of its loss of access to cheap energy viz Russian gas. Its economy will contract slightly this year with a growth rate of -0.1%.
Spain, on the other hand, has seen its growth projections revised upwards this year from just over 1% to now 3%. That makes it the second fastest growing industrial economy in the western world, surpassed only by Poland at 3.1%. Even the USA will grow less, at 2.6%. With the upward revised growth figure, Spain is set to be the eighth fastest growing, major economy on the planet.
A significant part of this growth comes from tourism, of course. It remains a major part of the Spanish economy at 14% of GDP. Spain is expected to attract a record 90 million visitors this year. It has been aided in part by its admirable stability and high-quality infrastructure in comparison to some of its principal competitors.
Spain has also seen a surge in growth in non-tourism services, especially in business consulting. The Economist article put this at 7-8% of GDP, having risen from 5.5% prior to the pandemic.
There are other factors, such as a growth in employment, largely driven by a record inflow of immigrants who account for 90% of this growth. Spain has grown from 40 to 48 million since the year 2000, all of that is accounted for by immigration.
Renewable Energy
Spain has also been proactive in renewable energy and related manufacturing. The Spanish government has this year signed 300 deals worth €18 billion to develop solar and wind power generation. The growth in the renewable sector has been so substantial that Spain now generates 60% of its electricity with renewables. It expects to reach 80% by 2030, 6% above previous projections of 74% by that date.
They will also reduce greenhouse gases by 32% below 1990, an improvement on the previous plan to reach 23%. In addition, there are multi-billion euro plans to build out substantial renewable-powered hydrogen production capacity. Spain will produce 20% of the EU’s green hydrogen, the most of all EU countries. By 2030, Spain will produce 25% of the entire world’s hydrogen.
Other job-creating, environment boosting deals that are setting up Spain to be a renewables leader include a €4 billion deal with Stellantis and China’s battery giant CATL to build a 50GW/year battery production facility in Zaragoza. There is also a deal between Catalonia’s Ebro EV motors and Chinese EV manufacturer Chery, which will re-start the shuttered Nissan plant.
These are all very good signs as Spain has had woefully low capital investment rates, which have been declining steadily since the 1970s. At its peak in 1970, 31.85% of GDP was in capital investment (manufacturing capacity). In 2023 it was down to 20.31%, better than the deepest trough of the post-2007 crisis but still in the doldrums. That compares with the USA’s investment rate of 21.88% but those numbers are half of what China invests at 43.15%.
As a result of that neglect of investment, manufacturing as a percentage of the Spanish economy declined from a peak in the mid-1990s of 16.66% to 11.48% in 2023. That’s the highest that it has been in thirteen years. That’s slightly better than the USA, at 10.2% but less than half of China’s 26.18%.
I know for some manufacturing is old fashioned. It’s all about services, they argue. But China isn’t the world’s largest economy for nothing. They are the workshop of the world and have systematically developed a series of industries that now dominate globally, from EVs to PV solar panels. They are now poised to dominate robotics.
More than that, while tourism has been a boon for Spain, it is the case that it is potentially fleeting. The current tourism mega-boom in Spain happened, in part, because tourists fled Egypt et al during the unrest of the Arab Spring.
Fashions can change but fixed capital is forever. Not quite but it’s more stable and long term than tourism. Europe will always need cars and energy. It might not always need to enjoy Spain’s beaches.
That’s why, while there are many good signs, there are still reasons for concern. Spain has effectively never recovered from the wipeout in investment during the 2007-2015 crisis. And this brings us as well to construction and housing starts. If we look at the pattern after the 2013 bottom in the economy, we see a parallel between capital investment and new housing construction.
What these two charts suggest is that housing construction – or the lack of it – is part of a larger pattern in Spain related to a lack of fixed capital investment. Of course, there has been the construction of hotels, and luxury homes. But the long-term success and security of Spain depends on resuscitating this investment somehow. It is also the only way to solve the current housing crisis.
The hope is that the current round of growth and the announced investments in strategic sectors will signal the beginning of a broader trend. There is, for instance, lots of money going into rail infrastructure at the moment.
Between 2023 and 2026 Spain will spend €24 billion. Almost half of this will go specifically to upgrading freight hubs, which will facilitate the movement of goods. There will also be more than €2 billion to upgrade rail in northern Spain and integrate it more fully into the EU rail system.
These are good things but there is much more to be done. Housing remains an area of major concern and is the area where all Spanish parties continue to play political games, rather than develop real solutions. This leads to regulatory and legal uncertainties that make the situation worse.
You can’t play to the audience; you must play to the problem. In other words, you need to find a solution and it’s guaranteed that it won’t please everyone. Nonetheless, some are optimistic as far as the construction industry is concerned as well.
A recent Caixa Bank study suggests that construction will be an area of strong growth in 2025. There is a nod in this study to recent reforms to land use regulations in Andalusia, which will help facilitate the permitting process and thus elevate housing starts.
There are also other areas of the Spanish economy that face even bigger challenges than construction, such as agriculture, textile, and the paper industry. Meanwhile, Spain continues to make huge strides by leveraging its excellent healthcare infrastructure to support and advance its leadership in the pharmaceutical industry.
The conclusion is that while there are some areas of long-term concern, the Spanish economy is doing better overall than most of the rest of the world – and better than almost the entire EU. We should raise a toast as the New Year comes to these successes and look forward to them continuing into 2025.
By Adam Neale | Property News | December 24th, 2024
