Introduction:
As the new year unfolds, Spain’s economic landscape appears more promising than anticipated, hinting at a favorable growth differential compared to other major European economies. Recent indicators point to a robust recovery in consumer spending, driven by an increase in households’ disposable income, projected to surpass 6% in real terms in 2023—an unparalleled surge in comparable data. However, the shadow over productive investment persists, reluctant to take off despite the windfall from European funds. This trend, if unaddressed, may eventually constrain medium-term expansion.
In the immediate term, the additional consumer spending continues to fuel economic activity, with a noteworthy and underdiscussed factor: Spanish companies are capitalizing on the demand surge more than their foreign counterparts. Only 24% of total demand is satisfied through imports, with the remaining portion sourced from domestic businesses (data from the last two years until the third quarter of 2023). This stands in stark contrast to other major European economies, where import penetration averages around 55% for the European Union.
The limited elasticity of imports in response to demand is a new development in Spain’s historical perspective. Foreign supply has exhibited less dynamism compared to previous expansionary phases, and conversely, the responsiveness of domestic supply has proportionally increased. During the pre-pandemic growth period, imports grew at a rate 50% higher than final demand, a gap that has now disappeared or nearly vanished in the past two years. Before the financial crisis, import penetration was even more pronounced, contributing to a colossal external deficit, a trigger for the crisis.
It is premature to ascertain whether we are witnessing a structural change reflecting an enduring improvement in the competitiveness of our productive fabric, particularly in an environment of high energy prices that have disproportionately affected companies elsewhere in Europe. An alternative and less optimistic explanation could lie in the sluggishness of investment in equipment and technology, traditionally reliant on foreign inputs. As this investment recovers—an undoubtedly desirable outcome—imports are expected to rebound.
Outlook and Challenges:
Nevertheless, we are on the cusp of a moderation in domestic demand in the coming months, at least from the consumption side. The rebound in households’ disposable income observed in the past year is a non-replicable phenomenon: wage growth is slowing, leaving little room for additional purchasing power improvement, and job creation is also normalizing. Additionally, the return to European fiscal standards, coupled with the government’s budgetary objectives, is incompatible with public consumption increases exceeding 2%, as estimated for the previous year. Fiscal policy is approaching neutrality, and monetary policy will remain contractive.
In contrast, the positive news is that Spanish companies seem to enjoy favorable conditions both domestically, gaining traction against imports, and internationally, especially in service-exporting sectors. All of this paints a picture of another year of positive growth, accompanied by a robust external surplus. However, there is much work to be done, both in terms of fiscal policy management and the utilization of European funds, to transform the current momentum into a sustainable cycle of prosperity.
Conclusion:
The Spanish economy’s resilience, fueled by a consumption surge, stands as a beacon of optimism. Balancing this with strategic fiscal maneuvers and leveraging European funds will be instrumental in ensuring that this impetus evolves into a sustained and prosperous economic cycle.