Spain's economic forecast according to Brussels: Growth, inflation, deficit

SPAIN will be one of the fastest-growing member States in the European Union between now and the year 2025, but will 'almost certainly' fail to meet the fiscal requirements established in the bloc in 2024, and is no longer the major economy with the lowest inflation.

This is the latest economic diagnosis from the European Commission in Brussels, which forecasts a gross domestic product (GDP) growth of 2.4% by the end of 2023, largely triggered by consumer spending.

Next year will see growth fall to 1.7%, but it will pick up by 2025, reaching 2%.

Spain is one of the top four largest economies in the EU, along with Germany, France and Italy – but Spain is the only one which will experience growth of over 1.5% in the next two years.

In fact, Germany could even see a minor shrinking in its economy before the end of 2023, the Commission reports.

Eurozone inflation: Huge fluctuations, but not in Spain

Until this month, Spain had the lowest inflation of all the biggest economies in the EU, at under 3%, but has now lost its crown – prices have gone up again for the first time in over a year, leaving inflation in the country at 3.5%.

The cost of groceries – food and non-alcoholic drinks – is largely to blame, showing 9.4% inflation in Spain; down from its 10.5% in September, but still well above the current average of 7.5% in the Eurozone.

One of the member States where food prices have risen the most – only Greece has higher food inflation, at 10.4% - Spain has shown a different trend in the past few weeks from the rest of the bloc.

In the single-currency zone, inflation has been slowly falling, reaching a year-on-year 2.9% in October.

Until Eurozone inflation reaches the European Central Bank's (BCE's) target of 2%, the Euribor – or euro interest rate – will not come down, and is predicted to rise again before the end of 2023 following record hikes that saw it rocket from below zero to over 4% in less than a year and a half.

EU-wide inflation, including non-Eurozone countries, sat at 4.9% in September and fell to 3.6% in October.

For the first time since August 2022, Spain's own inflation is now above the Eurozone average, although it remains below that of the EU-27.

But this is not due to a crisis situation in Spain – it is largely linked to other countries' double-figure inflation levels coming down drastically.

Prices across the Eurozone have not fallen – they have merely risen at a slower rate – although the impact on inflation has been huge in some of the common currency area's major economies.

In October 2022, Eurozone inflation had reached 10.6% on average, with Germany and Italy – at 11.6% and 12.6% respectively – surpassing this figure.

A year on, German inflation is now down to 3%, and Italian to 1.8% - a dramatic plunge even from the previous month, when they closed at 4.3% and 5.6% respectively.

France remains at 4.5%, higher than Spain, whilst Hungary, Romania and Czechia continue at above 8%.

Even though Germany and Italy have now overtaken Spain in terms of major economies with the lowest inflation, the best-performing member States in October actually saw inflation fall below zero.

Belgium, at -1.7%, topped the list, followed by The Netherlands, at -1%, and Denmark, at -0.4%.

Whilst the reduction in inflation may be partially due to the BCE's unprecedentedly-sharp interest rate rise, some if it is due to a fall in energy and fuel prices.

Energy inflation reached 41.5% a year ago, but is currently 11.2% cheaper than in October 2022.

EU recovery-fund loans, job creation and consumer spending to boost bloc's economy

The Commission expects EU-wide inflation to fall to 3.4% in 2024, leading to households recovering some of their lost spending power, and job creation will continue, albeit at a slightly slower rate than at present.

This job creation will help boost consumer spending, which will be the key to strengthening the EU and Eurozone economies, with unemployment at 12.1% by the end of 2023 and falling to 11.1% over the next two years, the Commission predicts.

EU post-Covid recovery funds will play a key part – non-refundable payments have been made, and member States will have the option to borrow a set sum from the year 2025 in addition, which will enable countries to spend and invest more in growth and stability.

This, however, is not likely to be entirely plain sailing, given that demand could well grind to a halt due to high interest rates.

In the case of Spain, rocketing Euribor rates have had a particularly significant impact, due to the country's high levels of public and private debt – although these debts have been gradually reducing, the European Commission reveals.

Spain to miss EU debt target – but it won't be alone

Despite its expected higher-than-average growth and more-or-less-average inflation, Spain is predicted to be one of the Eurozone countries that fails to comply with stipulated deficit levels in 2024.

Brussels says Spain's deficit has become 'structural', meaning it remains in place however well or badly its economy performs, and which is permanently 3% above its GDP.

Spain's government has pledged to reduce the imbalance in its public accounts over next year, keeping its deficit to a maximum of 3% – being a total debt of 103% of the GDP, the cut-off point for complying with EU rules – although the Commission believes that, 'unless something exceptional happens', Spain will not meet this target.

It predicts the country will close this year with an overall debt of 107.5% of its GDP, which will gradually fall to 106.5%, but stagnate at this level in the medium term.

Brussels had relaxed its fiscal rules since the pandemic, but the 'GDP+3%' ceiling will come back into play from 2024 onwards.

Countries which fail to contain their debts to within the 103% normally face significant fines and fiscal stipulations and conditions, but up to half the EU is expected to be in the same situation in 2024.

According to the Commission, 'at least a dozen' member States will miss the GDP+3% cut-off point, with France and Italy predicted to suffer a deficit of well over 104% of their GDP next year.