New economic scenario: prudent optimism in a context of uncertainty
The good growth data for the Spanish economy in the final stretch of 2024 lead us to revise upwards our GDP growth forecast for 2025. However, the greater likelihood of tariff tensions between the US and the EU invites us to remain cautious. In this regard, we expect the economy to grow by 2.5% in 2025, above the 2.3% we were previously predicting, albeit somewhat below the revision we could have made in the absence of this uncertainty factor.
The Spanish economy once again produced a very good growth figure in the final stretch of 2024. In Q4 2024, GDP grew by 0.8% quarter-on-quarter, spurred by the momentum of private consumption and investment, and once again clearly outpacing the euro area as a whole, which remained stagnant in quarter-on-quarter terms. With this figure in hand, the economy grew by a significant 3.2% in 2024 as a whole.
The growth throughout 2024 was sustained mostly by domestic demand. Of the 3.2 points of GDP growth, private consumption contributed 1.6 pps, supported by the strength of the labour market and that of demographic growth, while public consumption contributed a further 1 pp. The foreign sector, meanwhile, contributed 0.4 pps to growth, thanks to the good performance of services exports and the moderate tone of imports, although its contribution declined during the course of the year. The impressive growth recorded in 2024 is all the more so when we consider that it took place in a context of still high (albeit moderating) interest rates and anaemic growth in our main European trading partners.
The starting point is good, not only because of the latest growth figures, but also because of the absence of any obvious financial imbalances. The current account balance recorded a surplus in 2024 for the thirteenth consecutive year. This continued improvement has enabled the net international investment position – which measures the difference between a country’s financial assets and liabilities vis-à-vis the rest of the world – to reduce its debt balance to below 50% of GDP (97.5% of GDP in 2009). Also, private debt (households and non-financial firms) remains contained at 125.1% of GDP, according to the latest data for Q3 2024, which places it below the euro area average of 153.5%, while public debt has also steadily declined to reach 101.8% in December 2024, 3.3 pps less than the previous year.
The strong growth in the final stretch of 2024 has a mechanical knock-on effect on the growth forecast for 2025. As an example, even if the economy were to remain stagnant throughout 2025 at the level of GDP that existed at the 2024 year end, annual growth in 2025 would still be 1.2% due to the starting point being higher than the average GDP of the previous year.
The underlying assumptions of the scenario about the evolution of the ECB’s monetary policy, energy prices and exchange rates continue to add weight to the narrative that consumption and investment ought to gain prominence as growth drivers, displacing the role of foreign demand.
Firstly, our scenario envisages a gradual moderation of core inflation in the euro area as a whole, reaching 2% by the end of 2025. This pattern of inflation will allow the ECB, in a context of weakness in the euro area, to continue to steadily lower benchmark interest rates until the depo rate reaches 1.75% in the final stretch of 2025 (the lower bound of the range that is considered to be neutral).
Secondly, we anticipate a slight decline in the Brent barrel price: we expect it to be 76 dollars/barrel on average in 2025 (74.5 dollars in the previous scenario), slightly below the 79.8 dollars in the 2024 average. However, the impact on the Spanish economy will be limited due to the depreciation of the euro. The greater decoupling between monetary policies on either side of the Atlantic, with the ECB continuing to lower rates while the Fed has slowed its cycle of cuts, has led to a depreciation of the euro of around 7% between September 2024 and January 2025. We expect that this depreciation will have some continuity and that the euro will lose around 5% of its value against the dollar on average in 2025 compared to that of 2024. Thus, despite the fall in the dollar price, the price of Brent in euros would remain flat at 74 euros/barrel.
As for activity in foreign markets, we have revised downwards our expected growth of the euro area for 2025 by 0.5 pps to 0.8%, mainly due to the weakness of the German economy and the new tariff policy being pursued by the Trump administration. This slightly more adverse scenario reinforces the narrative that the growth of Spanish exports will slow in 2025.
The good growth data in the final stretch of 2024 lead us to make an upward revision to our GDP growth forecast for 2025. However, the greater likelihood of tariff tensions between the US and the EU invites us to remain cautious. In this regard, we expect the economy to grow by 2.5% in 2025, above the 2.3% we were previously predicting, albeit somewhat below the revision we could have made in the absence of this uncertainty factor.
Specifically, our scenario assumes a situation with «contained» tariff tensions in which there is no escalation and where the uncertainty surrounding this issue is dissipated by mid-year and the new «rules of the game» are already established. This assumption has a limited and transient direct impact in the case of the Spanish economy, since the country’s low trade exposure to the US means an estimated impact of 0.1 pp less GDP growth for every 10-pp increase in tariffs. It also limits the greatest source of risk, namely the indirect impacts derived from the heightened uncertainty.
The growth will be sustained mostly by domestic demand. Despite the good growth figures for private consumption and investment in Q4 2024, both components still lag far behind the other components of GDP. Thus, whereas GDP in Q4 2024 was 7.6% above the pre-pandemic level, private consumption reached 3.6% above that level and investment, just 2.5%. The recovery of private consumption in the post-pandemic period is languishing even more if we take into account the population increase experienced since 2022. Thus, real consumption per capita in Q4 2024 was still 0.4% below the pre-pandemic level of Q4 2019. The fall in interest rates and the gradual moderation of inflation will support the growth of domestic demand. Investment will be favoured by the deployment of NGEU funds, while the high household savings rate, which stood at 14.2% in Q3 2024 versus an average of 7.3% in the period 2015-2019, also gives private consumption plenty of room to grow.
However, we expect growth to moderate relative to last year, as some of the tailwinds that our economy has benefited from in recent quarters lose strength. In particular, we will see a normalisation of the growth rate of the tourism sector and a certain moderation of the expected population influxes. Also, the sustained weakness of the European economy, with a growth forecast for 2025 below 1%, coupled with the possible increase in tariffs between the US and the EU will adversely affect our economy.
In this regard, we expect the foreign sector to make a slightly negative contribution to growth in 2025, in contrast to the positive contributions of previous years. This negative contribution is explained by the moderation in the growth rate of exports, which is closely linked to the normalisation of growth in the tourism sector and the weakness of our main export markets, as well as by the greater momentum of imports due to the strength of domestic demand.
On inflation, in 2025 we expect it to continue to moderate and, after registering an average rate of 2.8% in 2024, to stand at 2.5% in 2025. This moderation will be accompanied by the gradual reduction of inflation in the services component and a more pronounced correction of inflation in the food component (going from 3.6% in 2024 to 2.0% in 2025), in line with the pattern observed in recent months. In contrast, the energy component will act in the opposite direction and limit the correction of headline inflation, spurred by the impact which the normalisation of VAT in the electricity tariff of January 2025 will have on the year as a whole, as well as by the impact that the depreciation of the euro will have on the oil price.
Finally, we expect the labour market to maintain a robust rate of employment growth, albeit slightly lower than that of last year. More specifically, we expect that the number of people in employment will grow by 2.0% in 2025, after registering 2.2% growth in 2024. In contrast, following the sharp increase in the labour force in 2023, with an annual growth rate of 2.1%, its growth rate moderated slightly to 1.3% in 2024. We expect that in 2025 the labour force will continue to grow at a significant rate (1.2%), albeit somewhat less than last year. These assumptions on the future trends in employment and the labour force lead to an improvement in the unemployment rate, which will reduce from 11.3% in 2024 as a whole to 10.7% in 2025.
As usual, the risks surrounding the scenario are multiple and material. The main upside risks are related to a higher than anticipated growth rate in consumption and investment if the rate cuts are accelerated or if households release their pent-up savings more rapidly. The possibility of a ceasefire in Ukraine could also result in a drop in energy prices. However, the main risks remain on the downside and are geopolitical in nature. At the international level, a greater than expected increase in trade tensions between the US and the EU could have a greater negative impact on trade flows and thus on the growth of our economy and that of our trading partners. We also cannot rule out the possibility of a further escalation of the conflict in the Middle East, which could trigger a spike in oil prices. At the national level, it is important that the execution of NGEU funds gains traction in order to support the recovery of business investment.1
- 1. See the article «How the NGEU funds are going in Spain: bread for today and hope for tomorrow», in the Dossier of this same report.
- 1. See the article «How the NGEU funds are going in Spain: bread for today and hope for tomorrow», in the Dossier of this same report.
