Spain: much ado about nothing, for now

The outlook for the Spanish economy continues to be conditioned by developments in the trade war between the US and the rest of the world, as well as by our assumptions about it. Despite the heightened uncertainty, the ongoing negotiations – such as the reduction of tariffs with China, the US-UK trade agreement and the temporary 10% tariff on the EU until July while the definitive ones are being negotiated – suggest that the US tariffs will likely stabilise at a level close to the 10% assumption we made in February. However, so far, the spike in uncertainty has been greater than anticipated and we cannot rule out further episodes of tension.

The revision of the forecast scenario incorporates the latest economic activity data – which, overall, have been in line with expectations – as well as an update of the assumptions regarding energy prices and interest rates based on the latest market information. As a result, we have revised our GDP growth forecasts for 2025 and 2026 downwards by 0.1 pp, placing them at 2.4% and 2.0%, respectively.

In the labour sphere, the lower projected growth is offset by a better than expected figure in the Q1 2025 Labour Force Survey, which allows the expected path for the unemployment rate to remain unchanged. In terms of inflation, the downward impact of more moderate energy prices than those anticipated in February has been partially offset by the acceleration of unprocessed food prices. Overall, we have revised our 2025 inflation forecast downwards by 0.1 pp, to 2.4%, and have kept the 2026 forecast unchanged at 2.2%.

In May, the PMI for the manufacturing sector rebounded following the slump recorded in April, climbing to 50.5 points, above the 50-point threshold indicating expansion in the sector. In contrast, the counterpart indicator for the services sector slipped 2.1 points to 51.3 points, affected by weak international demand. Consumption, for its part, has been showing positive signals in Q2 to date. Retail sales in April grew by 0.7% month-on-month, with the year-on-year rate reaching 4%. Also, with data up to 21 May, the CaixaBank Research Consumption Indicator, which is based on duly anonymised data on card spending and cash withdrawals, shows an acceleration in the year-on-year growth rate of 0.6 pps compared to the previous quarter, reaching 4%. Overall, the indicators suggest that the growth rate of the economy in Q2 could be close to, albeit somewhat below, that of the previous quarter.

In May, the number of Social Security affiliates increased by 0.9% month-on-month, falling short of the usual increase in that month of the year (+1.2% on average in the months of May during the period 2014-2019). This result may be affected by the change of seasonal pattern that is being observed after the pandemic, with the tourism season starting earlier, such that some of the hiring in the accommodation and food services sector is brought forward to April. Correcting for seasonality, employment posted an increase of 20,790 affiliates, the lowest growth since July 2024, although the April-May average stood at 44,975, which exceeds the monthly average for Q1 (39,191). Thus, again in seasonally adjusted terms, the number of affiliates grew by 0.53% on average in April and May compared to the Q1 average. This is a steady growth rate and is only just below the quarter-on-quarter growth rate recorded in Q1, of 0.58%.

Headline inflation fell 0.3 pps to 1.9% year-on-year. This decline is mainly due to the reduction of prices related to leisure and culture, as well as transportation (which includes fuels). On the other hand, core inflation resumed its downward trend, falling 0.3 pps to 2.1% year-on-year following the rebound in April, which was caused by the effect of Easter. The fall in the core index hints at a possible decline in services inflation, which last month stood at a high 3.9% driven by the increase in tourism-related services. It remains to be seen how unprocessed food prices have evolved, this being the component that has shown higher than expected increases in recent months, with year-on-year rates in excess of 5% since February due to the spike in the price of meat and eggs. The short- and medium-term inflation outlook remains moderate, largely thanks to the correction of prices among the main energy commodities.

The set of indicators available for Q1 point to an acceleration in the growth rate of the real estate market, both in prices and in terms of activity, thus giving continuity to the upward trend of the previous year. The repeat home sales price index produced by the Association of Property Registrars grew 14.6% year-on-year in Q1 2025, surpassing both the figure for the previous quarter, of 12.6%, and that of 2024 as a whole, of 10.4%. Also, on the activity side, sales rose 13.7% year-on-year in Q1 2025, compared to 9.9% year-on-year in 2024 on average. The strength of demand, coupled with a more modest increase in supply, leads us to predict that the price pressures will persist in the coming quarters.

In May, the cumulative 12-month current account surplus fell 0.22 pps to 2.55% of GDP. The figure for May is almost 0.5 pps below the balance at the 2024 year end, when it stood at 3.0%. This deterioration with respect to the end of 2024 is almost entirely due to the balance in the trade of non-energy goods, for which the deficit has widened by 0.34 pps to –0.61% of GDP. The increase in the deficit is explained by the impact of imports, which grew more than exports amid strong domestic demand: in the trailing 12 months to May 2025 they registered year-on-year growth of 5.5%, compared to 4.2% in the case of exports.