Economic growth forecasts for Spain set to change for the better: Bank of Spain makes an upward adjustment to 2.3% due to runaway growth in tourism

The Spanish economy grew by 2.5% last year and all indications - inflation, rising interest rates, the European economic slowdown - suggested that this year's growth would be much lower, between 1.8% and 2%, according to the central government's optimistic forecasts. However, as the months go by, the main economic forecasters and watchdogs are improving their forecasts for year end. A few days ago the International Monetary Fund (IMF) raised its own forecast by half a percentage point to 2.4% growth for Spain in 2024. This Tuesday it was the turn of the Bank of Spain to raise its projection by four tenths of a percentage point to 2.3%.

Ángel Gavilán, Director of Statistics at the Bank of Spain (BoS), explained that the boost to the forecast is due to the good performance in the service sectors, in particular tourism, alongside the unexpected boost to GDP in the first quarter. Income generated by tourism services was the real surprise in the first quarter, growing by 19% compared to the same period last year thanks to a record Easter week. Other services unrelated to tourism also grew by 6%.

Moreover, the Bank's latest forecasting report mentions that tourism is at an all-time high thanks to a growing diversification in visitor origin, the destinations visited and the trend towards year-round tourism and less seasonality. The BoS report also points out the higher average expenditure favoured by more long-haul tourists and the increase in the number of places in higher category hotels. However, Gavilán warns that this boom could be "transitory", although he is surprised that the post-pandemic boom has kept going for such a long period.

Turning to the details, data from the Bank of Spain - provided by the INE (Institute of National Statistics) - indicate that total spending by foreign tourists has grown by 54% in 2024 compared to the period 2016-02019. The tourists who have most increased their number of visits are those from the USA, some 350,000 more now than in 2019 and, from the rest of the Americas, almost half a million more people than five years ago have visited.

Domestic demand will remain "the main support for activity" until 2026. Even so, per capita household consumption is still three points below pre-pandemic levels despite the fact that the average savings rate has increased with respect to 2019. Part of this is linked to an "ageing population", according to the Bank's suspicions. Nevertheless, with respect to the second quarter the report calculates that growth will be around 0.5% following the "surprising" boost of 0.7% in the first quarter. This optimism is considered to be due to the positive developments in the jobs market similar to that of the first quarter of 2024.

Should these projections become reality, then GDP will be nine points above the pre-pandemic level by 2026. This improvement would place Spain above the EU average (eight points), but the Bank of Spain adds some caution: as migratory flows will be more intense in Spain than in the rest of Europe, in per capita terms GDP will only be 4.8 points higher than in 2019 compared to a 6-point average for the EU.

The inflation forecast is not so positive. The unexpected spike in oil prices on international markets has led to higher fuel prices. Moreover, the reversal of anti-crisis measures is pushing up inflation. In this respect, the Bank of Spain estimates that the CPI (Consumer Price Index) will close out this year at 3%, three tenths of a percentage point higher than its March forecast, and 2% next year, one tenth of a percentage point higher.

Specifically, the increase from 2.5% to 3.8% in the excise tax on electricity and the rise from 10% to 21% in VAT on gas has had an effect of 0.14 percentage points on general inflation, according to the Bank of Spain's calculations. Moreover, the elimination of VAT subsidies on basic foodstuffs on 30 June will raise the July inflation rate by two to three tenths of a percentage point and one tenth of a percentage point upwards for the 2024 average, according to Gavilán. He reiterated that the measures should have been "more focused" so that the most vulnerable groups would have been helped at a "much lower" budgetary cost.

The report also highlights that food inflation continues to be higher in Spain than in the eurozone countries. Although food prices continue to slow down in their price hikes despite the upturn in the general CPI rate in March and April, this is down to what goes into the standard Spanish shopping basket. In other words, the higher rate of food inflation is not due to the fact that products are registering higher prices in Spain than elsewhere in the eurozone, but rather that Spanish households are buying more of the products that have seen the biggest price rises.

This is the case with olive oil, which has tripled in price in the last two years and which is a basic and widely consumed product among Spanish families compared to other EU countries.