The European Commission has, for the time being, “saved” Spain from the negative effects of the tariff war fueled by Donald Trump. Brussels has raised its growth forecast for the country this year to 2.6 percent, three-tenths of a percentage point higher than the November estimates. Nevertheless, the uncertainty generated by US trade policy will have significant repercussions at the European level. In its spring forecast published on Monday, the Commission lowered its estimate for both the European Union as a whole and the eurozone by four-tenths of a percentage point, with eurozone growth estimated at 0.9 percent this year.
In the specific case of Spain, the Commission expects the economy to benefit from both the spillover effect of more dynamic growth of 3.2 percent in 2024 and an increase in household consumption and private investment—one of the variables most difficult to recover from the COVID-19 crisis. While domestic demand remains “the main driver of economic growth” during the analysis period, Brussels warns that rising trade tensions could cause net exports to reduce growth momentum both this year and next.
“Consumer spending would be supported by moderate increases in real wages and higher employment growth, despite continued, albeit slowing, internal migration,” explains the panel led by Ursula von der Leyen in its country-specific report. However, uncertainty regarding global trade and tariffs – with Europe and the US having observed a truce to continue negotiations – will weigh on private investment growth, although the Spanish economy’s direct contact with the world’s leading economy “generally remains limited.” Lower interest rates and the use of European funds will help offset some of these negative effects.
The Spanish economy is forecast to slow further next year, but is still expected to grow at 2 percent. According to the Commission, downside risks could arise from a sharper-than-expected slowdown in economic activity in the euro area and in Spain’s main trading partners, particularly in countries with relatively high exposure to the US markets. This could have adverse effects, further complicating access to export markets, delaying business investment, and keeping the household savings rate above the long-term historical average.
Regarding employment, the Commission expects the unemployment rate to decline steadily to just below 10 percent by 2026, down from 11.4 percent in 2024. This is against a backdrop of further weakening prices (Brussels forecasts headline inflation in Spain to be 2.3 percent this year and 1.9 percent next year) and the ability of public administrations to reduce their deficit to 2.8 percent.
The improved forecasts are consistent with the assessments of other national and international bodies that have also issued more optimistic growth forecasts for Spain. The Bank of Spain raised its outlook by two-tenths of a percentage point last March, estimating the economy’s growth to 2.7 percent. The reasons it cited for this are consistent with those presented today by the EU.
The International Monetary Fund (IMF) also identified Spain last month as the only major economy for which it has revised its forecasts upwards. Specifically, the GDP estimate was raised by two-tenths to 2.5 percent, while the estimate for next year remains unchanged at 1.8 percent.
“Unfortunately, it is true: we are in a turbulent time of great uncertainty, as we have already experienced with the pandemic, the war in Ukraine, and now with the tariffs. We have to live with that when we prepare the forecasts,” said Economic Commissioner Vladis Dombrovskis at a press conference, emphasizing that these are “the best forecasts” that could be made given the global circumstances. He highlighted the tariffs under the Trump administration as “one of the major reasons” for the current instability.
Dombrovskis emphasized that, despite the complex overall context, the European economy “remains resilient, with forecasts for an acceleration of growth next year.” Nevertheless, uncertainty remains a key factor to consider, particularly given the negative impact that the current trade crisis with the United States is having on the productivity.
Despite these challenges, the European market is showing “a solid performance.” Inflation is slowing, but more slowly than expected in the fall. The Commissioner emphasized the importance of the European Commission’s Competitiveness Compass as a tool to strengthen sustainable growth, as well as the need to stimulate domestic demand and maintain a high level of investment, which is supported by the NextGenerationEU recovery funds. She also highlighted the new trade agreements and the growing importance of defense spending. Regarding fiscal rules, Dombrovskis noted that most countries have already requested to activate the escape clause for securities investments, with the exception of Spain, which has not yet done so.
