GDP growth cools in Q1

GDP reading: Economic activity softened in the first quarter, with GDP expanding 0.6% on a seasonally adjusted quarter-on-quarter basis (Q4 2024: +0.7 s.a. qoq), narrowly missing market expectations and marking the worst reading since Q2 2023. Nonetheless, Spain remained the fastest-growing large economy in the Euro area, and the print exceeded the group’s average of 0.4%. On a seasonally adjusted year-on-year basis, economic growth waned to 2.8% in Q1, following the previous quarter's 3.3% increase and marking the worst reading since Q1 2024.

Private spending and investment drive the slowdown: Household spending growth fell to 0.4% in Q1, marking the weakest expansion since Q4 2023 (Q4 2024: +0.9% s.a. qoq) amid higher unemployment and inflation. Moreover, fixed investment growth slowed to 1.1% in Q1, following 3.5% recorded in the prior quarter. Meanwhile, government consumption was unchanged at a 0.2% expansion in Q1 (Q4 2024: +0.2% s.a. qoq). As a result, domestic demand contributed 0.4 percentage points to the headline reading, well below Q4’s 1.2 percentage points. On the external front, exports of goods and services growth improved to 1.0% in Q1 (Q4 2024: +0.1% s.a. qoq), with exports of services accelerating and exports of goods falling at a softer pace. Conversely, imports of goods and services growth waned to 0.7% in Q1 (Q4 2024: +1.3% s.a. qoq), marking the softest reading since Q2 2024. All in all, external demand contributed 0.2 percentage points to the overall print, improving from Q4’s 0.4 percentage point detraction.

Momentum to soften ahead: Our panel expects sequential GDP growth to ease slightly in the coming quarters and forecast downgrades for Q2 are now in the cards: On 28 April, Spain suffered a widespread power blackout, which halted economic activity at large. Power was restored on 29 April, but initial estimates suggest a GDP loss of EUR 1.6 billion, around 0.1% of GDP. Regarding recent U.S.-EU trade tensions, the Spanish economy should face softer headwinds than its regional peers as it only exports goods worth 1.2% of its GDP to the US, well below the Euro area’s 3.0% average. Regardless, exports growth is set to slow over the year as a whole and, coupled with softer public spending, should bring 2025 GDP growth below 2024’s figure. That said, private spending and fixed investment will keep momentum well above trend.

Panelist insight: Analysts at the EIU commented on the outlook: “Alongside other south European countries, Spain is set to continue to enjoy one of the fastest growth rates in the region, after rebounding faster from the pandemic-induced recession than Germany but behind Greece and Portugal. This is due to a carry-over effect from stellar growth in 2024, as well as strong labour cost competitiveness, generous fiscal spending supported by EU funds and a buoyant tourism sector.”

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