Spain's economy to grow by 2.5 per cent this year but faces 2027 inflation slowdown

According to the most recent IMF forecast, Spain's GDP is 0.1% below the Bank of Spain's forecast for this year. In addition, it predicts a growth slowdown in 2027, with an increase of just 1.8%, although this will still be higher than the 1.2% recorded in the eurozone, due to soaring inflation.

During the first half of the year, Spanish GDP maintained "steady momentum", which, alongside Ireland's economic recovery, led to a rebound in Eurozone activity and an improvement in the IMF's forecast for this year.

Consequently, the Washington-based organisation expects growth in the eurozone to improve by 0.2% point to 1.1% in 2026, while maintaining its forecast for next year at 1.2%. By comparison, the outlook for Spain is better than that of other major global economies: in neighbouring France, GDP will rise by 0.4% this year and 0.7% next year, a reduction of 0.2% annually compared with previous projections.

In Germany, although the growth outlook stands at 6.1%, the economy will grow by only 1.3% and 1.1% over the next two years, respectively. In the US, annual growth of 2.3% is expected over the two-year period, lower than Spain's for this year but not for next year.

Despite this strength, inflation will hit the Spanish economy hard. The conflict in the Middle East has caused energy and food costs to rise significantly. Furthermore, it has halted the decline in inflation that had been anticipated prior to the outbreak of the war between the US and Iran in late February.

This new wave of price pressures threatens to delay the return of core inflation to levels in line with the official target, heightening the risk of a situation that may force central banks to maintain a more restrictive monetary policy with higher real interest rates to curb second-round effects.

Consequently, the IMF forecasts runaway inflation of 3.7% for Spain this year, 0.7% higher than its forecast last April. The rise in prices will be well above the Eurozone average, where inflation is set to rise by 3.1% on average. However, countries such as Belgium (3.8%), Greece (4.2%) and Bulgaria (4.9%) will end the year with a worse outlook for their CPI.

Inflation will ease heading into 2027, but its impact will still be felt: in Spain's case, it will stand at 2.7%, still 0.3% above the April forecast. The IMF anticipates an improvement in prices next year due to various factors: it expects tensions arising from the war to ease, as well as more restrictive monetary policies from central banks, which have already prompted the ECB (European Central Bank) to raise interest rates twice this year, bringing them to 2.5%, and the Federal Reserve to raise them by 25 basis points, to a range of 3.75% and 4%, after three years of leaving them unchanged.

The IMF also expects greater adjustment and consolidation in the public finances of advanced economies following a period marked by support measures to offset the rise in energy costs.

This outlook is more optimistic than what the Bank of Spain released last week, which forecasts inflation to remain stuck at 3.9% and 3.7% for 2026 and 2027, respectively. Furthermore, the Bank of Spain warns that the CPI could soar above 4% this year and remain at 4.6% next year if tensions escalate in the face of a conflict that shows no sign of ending, which could also hamper the country's economic growth.

Despite this climate of uncertainty caused by armed conflicts and new trade barriers resulting from a more restrictive foreign policy initiated by the Trump administration, the global economy remains "steady" thanks to strong labour markets and resilient financial systems, IMF Chief Economist Silvana Tenreyro says. That is why the IMF has raised its forecast for global economic growth to 3.1% for 2026, 0.1% higher than previously forecast. It has maintained its forecast at 3.4% for next year.

However, the rise in commodity prices means that inflation cannot withstand the same pressures as the wider economy, so it will rise to 4.7% this year, although it will fall to 4.1% in 2027. The impact on the core rate will be limited.

The IMF highlights that, despite the rising cost of living, the economy has managed to withstand this inflationary shock thanks to the reorientation and relocation of energy supplies, as well as the replacement of traditional fuels with other renewable energy sources and greater energy efficiency in households. Without these measures, the disruption in the oil market alone would have significantly reduced global growth this year.

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