Spain Government Consumption (ann. var. %)

Economy continues to expand despite sharp contraction in domestic demand in Q4

According to a preliminary estimate, GDP rose 0.2% on a seasonally adjusted quarter-on-quarter basis in Q4 2022, matching the increase recorded in Q3. An improved performance of net exports a faster increase in public expenditure offset a sharp contraction in consumer spending and a more pronounced decline in fixed investment. In year-on-year terms, the economy grew 2.7% in Q4, down from Q3’s 4.8% expansion.

Private spending shrank 1.8% on a quarterly basis—following a 1.8% expansion in Q3—amid soaring core inflation, depressed sentiment, depleted savings and worsening labor market dynamics. Meanwhile, fixed investment fell 3.8% (Q3: -0.6% qoq), weighed down by faster contractions in housing investment and machinery and equipment investment—likely due to tighter financing conditions and market-unfriendly policy measures. Meanwhile, government consumption increased 1.9% from the prior quarter (Q3: +1.6% s.a. qoq) as the government loosened the purse string ahead of 2023’s electoral cycle.

Meanwhile, the external sector supported the economy as exports shrank less than imports: Exports of goods and services dipped 1.1% in seasonally adjusted quarter-on-quarter terms (Q3: +0.4% s.a. qoq). In comparison, imports were down 4.2% in quarterly terms (Q3: +3.1% s.a. qoq) amid shrinking domestic demand.

The economy looks set to contract in the first quarter of this year. Stubbornly-high core inflation, downbeat consumer confidence and a worsening labor market seem set to weigh on household spending. At the same time, investment activity will likely suffer from the effects of higher interest rates, erratic policy measures and global headwinds. Looking further ahead, the electoral cycle in 2023 should keep government spending elevated, translating into subdued investment activity and weak consumer spending.