As we end 2024, is Spain’s economy cause for cava or caution?

Spain has been ranked the world’s best performing economy in the annual rankings from The Economist, jumping to the top of the list from joint eighth position with Portugal in 2023. 

European Mediterranean countries performed well for the third consecutive year in the chart, which measures five key economic and financial indicators in 37 “mostly rich” countries that are members of the OECD. 

All around the world we see a disconnect between real and perceived economic conditions

Last year’s winner, Greece, is now joint third with Denmark, with Ireland in second place and Italy coming in fifth. The USA hasn’t fared so well, plummeting to 20th on the list from last year’s third.  

Overall, The Economist noted “a strong global performance” in its analysis of GDP, stock markets, core inflation, unemployment and government deficits. 

Proceed with caution

Esade’s Omar Rachedi attributes Spain’s sounding results to a few key factors. One is the country’s inherently cyclical economic nature. During expansion periods, its GDP tends to grow faster, while in recessions, it contracts more sharply. 

This cyclicality extends to the labor market as well. “In periods of economic growth, Spain creates significantly more jobs than its peers, which explains the record-high levels of employment we see today. Conversely, during recessions, Spain often experiences record unemployment rates,” says the Associate Professor at Esade and former economist at the Bank of Spain. “This dynamic is partly due to the somewhat rigid and dual nature of Spain’s labor market regulation.” 

Migration patterns are also an important factor in Spain’s economic success, Rachedi agrees. “Spain sees strong inflows of workers when the economy is thriving, and these flows slow or stop altogether during recessions. Understanding these migration trends is crucial to making sense of the labor market.” 

The Spanish growth has been largely driven by strong public spending

Another important reason is public spending and exports, the main contributors to the Spanish GDP in 2023 and 2024. “This comes from the contributions of the EU Next Generation funds as well as the lasting effects of public spending initiatives following the Covid crisis,” he says. On the export side, the main industries have been tourism and the export of professional services. 

The double-edged sword of tourism

The cyclical nature of Spain’s economy can also be attributed to the strong reliance on tourism. Despite ongoing protests in holiday hotspots and global concern over the climate crisis, the warmer temperatures have extended the summer season. In October, more than 8.9 million visitors (an increase of 9.5 percent from 2023) contributed €11.898 billion to the economy (up 15.5 percent). It represents 12.8 percent of its GDP. 

Professional service exports are also “a critical factor” in growth according to the IMF, which notes a surge in services exports of 23.3 percent above 2019 levels by the first quarter of 2024. “This is due to the competitiveness in low labor costs of Spain compared to other advanced economies,” says Rachedi. 

Record levels of public spending post-covid, boosted by contributions from EU Next Generation funds, all added to the overall improvement in Spain’s score. 

The poor relations in Europe?

The Economist list shows a marked turnaround for the Mediterranean countries of the EU, which not so long ago were seen as the poor relations of the more dynamic north. With Germany and France now floundering in the bottom half of the list, have Eurozone economies been turned on their head? Professor Rachedi thinks not. 

A slowdown in northern European countries is enabling their southern counterparts to catch up

“What we observe now is not a convergence of the previous weak performance of southern European countries to catch up with the north, but rather vice versa - a slow-down in northern European countries to catch up with the south.” 

The positive conditions of Spain, he says, are largely driven by strong public spending, which makes it unclear whether the current growth will be structural or temporary. At the same time, the German manufacturing crisis, particularly within the automotive industry, is slowing down the dynamism at the core of Europe. 

Greece and Portugal have managed to structurally improve their conditions, with Portugal enjoying growth while substantially reducing public debt. Italy, on the other hand, is finally benefiting from growth, but Rachedi warns this is temporary and fueled by significant fiscal subsidies.  

“These subsidies have yielded little growth and will create huge problems in terms of fiscal deficit and debt over the next few years,” he explains. 

Numbers and reality

While The Economist’s optimism is welcome, it might not be time to crack open the cava just yet. Spain’s place at the top of the economic leaderboard may come as a surprise to the many citizens whose standard of living isn’t enjoying the same levels of progress. “What we observe all around the world is a disconnect between real and perceived economic conditions,” he states. 

This disconnect between the league tables and the reality of the cost of living is due in part to the residual impact of post-Covid inflation. Policies aimed at minimizing the effects of unemployment were successful, but they came at a cost. "As citizens we did not fully understand that the high prices were in part replacing the even larger costs of not having a job at all,” explains Rachedi. 

In addition, there is also a psychological bias at play. When we receive higher wages, we believe it’s because we’re good at our jobs and we deserve it. But if those higher wages aren’t enough to cover the higher prices caused by inflation, that’s the government’s fault. “We tend to attribute the bad news to somebody else and the good news to our own effort and abilities,” Rachedy says. 

This disconnect has played a large role in over 100 global elections in 2024 that saw around 70 percent of incumbent governments ousted. Perhaps the most notable was in the US, when Democrat messaging wasn’t enough to convince voters the Biden-Harris administration had delivered good economic results over its four-year term.  

Spain, best economy of 2024

The fact remains that the Spanish economy is experiencing strong momentum. As The Economist notes, “In Spain annual GDP growth is on track to exceed 3%, driven by a strong labor market and high levels of immigration, which mechanically lift economic output.”  

While the cyclical and structural risks remain, the European Commission expects Spain’s economy to remain “robust”. As we approach the end of a positive 2024, perhaps it won’t do any harm to heed The Economist’s advice for Spain: “They deserve a fiesta.”