How Spain is outperforming its European peers

Pandemic aside, the eurozone is facing the worst set of economic conditions since the sovereign debt crisis more than a decade ago.
Growth is weak, Germany, the bloc’s economic powerhouse, is in the doldrums and Donald Trump threatens to hobble the continent’s exports with punitive tariffs.
However, there is one bright spot: Spain. Once at the centre of a blow-up in European government debt markets in 2012, the country now boasts the highest economic growth of any advanced economy.
According to the latest figures from Eurostat, the official agency, Spain’s economy expanded by 3.4 per cent year-on-year in the third quarter. Compared with the previous quarter, GDP rose by 0.8 per cent, among the highest in the eurozone.
According to ING, the Dutch bank, Spain has cemented its position as one of the eurozone’s “growth engines”.
Researchers at the International Monetary Fund believe the Spanish economy is set to expand by 2.9 per cent this year and by 2.1 per cent in 2025. Rachel Reeves, the chancellor, must look on with envy. While forecasts have been upgraded steeply over the past year, the IMF believes UK GDP will increase by 1.1 per cent this year and by 1.5 per cent next year. Germany is poised to post zero growth this year, the IMF said.
Differences between percentage points are worth tens of billions of pounds, euros or dollars to government finance departments.
Like other big European economies, Spain has benefited from a steady reduction in inflation over the past year, down from a peak of 10.7 per cent in 2022 to 1.8 per cent. Unemployment, however, remains a cloud. At 11.2 per cent, it is the highest in the eurozone, but that rate is now down to the lowest level since the financial crisis. More than 25 per cent of under 25-year-olds are jobless in Spain, also a peak for the common currency bloc.
Immigration replenishes labour market
While countries in the European Union have become increasingly hostile toward migrants, Spain’s left-leaning government has adopted a liberal attitude.
Pedro Sánchez, the Spanish prime minister and leader of the ruling Socialist Workers’ Party, has been a champion of the role of immigration in lifting his country’s economic growth rate. On a recent tour of West Africa, Sánchez said: “The contribution of migrant workers to our economy is fundamental, as is the sustainability of our social security system and pensions.”
When trying to stimulate economic growth, policymakers can select from a number of options: raise government spending, cut taxes, reduce interest rates or try to improve productivity. Lowering barriers to inward migration expands a country’s labour supply, all else being equal, thereby increasing the amount of goods and services it can produce.
Spain’s migrant population has ballooned in recent years. So far in 2024, 42,000 undocumented migrants have arrived in the country, up by 59 per cent compared with the previous year. According to the Spanish statistics office, more than 1 million immigrants will arrive in the country each year until 2028.
Recently, a large share of these immigrants came from West Africa and entered Spain via the Canary Islands, a burgeoning source of discontent between politicians in the archipelago and those on the mainland. Sánchez also hopes to provide legal status to up to 500,000 undocumented migrants, mostly from Latin America.
According to research by analysts at BBVA, a Spanish bank, “since 2021, the flow of people from abroad accounts for 90 per cent of the observed increase” in Spain’s workforce.
The Bank of Spain, the country’s central bank, also cited “migratory flows” as one of several factors that have led to the economy outperforming its European peers. In April it said that the country may require 25 million migrants over the next three decades to offset worker shortages.
Migrants are also not just being absorbed by low-paying low-skilled sectors. BBVA said that the new cohort of migrants are entering the labour market with less “occupational segregation… due to the increased participation of immigrants across virtually all occupations”.
Tourism boom
Sun. Food. A tapestry of architecture stretching from Barcelona’s gothic masterpieces in the northeast to Seville’s baroque churches in the south. Even the oldest operating restaurant in the world in Madrid (Casa Botín). It is hardly a surprise that Spain is the world’s second leading tourist destination (behind France).
All that beer, wine and culture is not just an allure for holidaymakers: it makes for a foundational pillar of the Spanish economy. In August, 7.3 per cent more tourists visited the country compared with the same month last year, with 10.9 million international tourists arriving. Visits are running above their pre Covid-19 levels. In its latest quarterly report on the Spanish economy, the Bank of Spain said that the “extraordinary momentum of tourism” had propelled GDP upwards.
However, locals in some Spanish cities would sooner give up the tourist-related economic benefits. They argue that visitors clog up the streets, raise prices and force up rents. A sign held aloft by one anti-tourist protester in Barcelona over the summer read, “Tourists go home”.
If they did, their dollars, pounds and euros would need to be replaced by something else to support an industry that employs about one in ten people in Spain.
Foreign money flows in
Overseas investment has also supercharged growth. According to fDi Markets, a database of cross-border investment which is owned by the Financial Times, since 2019 Spain has been the world’s sixth largest destination for foreign investment projects.
“Much of this investment is going primarily to high value-added sectors,” according to the Spanish government, with renewable energy manufacturers big beneficiaries.
Spanish fiscal policy remains supportive, aiding consumer spending. Interest rate cuts by the European Central Bank will amplify incentives to spend. While the ECB lifted rates to a record high of 4 per cent last year, the transmission of these rate increases to the real economy has been blunter than in previous tightening cycles. The ECB has lowered borrowing costs to 3.25 per cent already.
Growth strong despite floods
The human toll, damage to livelihoods and local infrastructure from catastrophic floods, mainly in eastern Spain, have raised alarm about how the country’s economic health will hold up as natural disasters become more common.
Valencia, a region that generates about 10 per cent of Spanish GDP, was the hardest hit by the floods. Barcelona was impacted too.
Analysts at Pantheon Macroeconomics, a consultancy, which examined the relationship between heavy rainfall in Spain and private sector activity, said: “The hit from recent flooding in Valencia and Barcelona is likely to be minimal — in economic terms — for Spain as a whole.
“Further flooding would widen downside risks more meaningfully, but in any event Spain almost surely will remain top of the pile among the big four eurozone economies.”