Spain Economic Forecast

The economy continued to expand in the first quarter of this year. Strong external demand and rebounding investment activity underpinned the economy; the former came on the back of a turnaround in all subcomponents while the latter benefited from a strong tourism sector—partially thanks to the Easter season. On the flipside, household spending fell again, buffeted by elevated core inflation and rising interest rates. Meanwhile, ahead of 28 May local elections, the government recently approved a law capping rent increases and introducing rent controls in high-demand areas—a decision that might hit real estate investment and exacerbate housing shortages. Moreover, in a further vote-catching move, the administration announced plans to revamp and build over 100,000 social dwellings, though the feasibility of the plans has been called into question.

Harmonized inflation fell to 3.1% in March from February’s 6.0%, while core inflation receded just 0.1 percentage points from February’s record high. Price pressures should ease further this year due to higher interest rates, weaker domestic demand and stabilizing commodity prices. Pre-election spending poses an upside risk. Commodity price swings are a factor to watch.