Spanish Economy's Growth Faces Headwinds as Tariffs Loom

The Spanish economy kept growing quickly at the beginning of the year, indicating persistent robust performance among developed nations' leading economy before potential trade tariffs might slow down this progress.
The gross domestic product rose by 0.6% during the initial quarter of the year, aligning with what economists had predicted, as stated in data released on Tuesday by Spain’s statistical office.
Goods and service exports increased by 1.0% which marked a significant uptick compared to the prior quarter. This suggests ongoing robustness within Spain’s flourishing tourist industry, as well as an early surge in exports before substantial U.S. trade duties come into effect at the beginning of the next quarter. Should these tariff measures become long-term, they might cause Spain’s economic expansion to decelerate for the remainder of the year.
At the beginning of the year, economic growth was widespread, with manufacturing expanding along with increased government spending, investments in infrastructure, and higher consumer spending driving the country's economy forward. In comparison, the two biggest economies in the Eurozone—Germany and France—are anticipated to have only modestly expanded by 0.2% each quarter; official data for these countries will be published later this week.
When the International Monetary Fund released new forecasts last week, Spain stood alone among developed nations with an improved economic growth projection for 2025. The organization presented a bleak view of worldwide growth due to significant increases in trade tariffs. It reduced its prediction for US economic expansion this year to 1.8% from 2.7%, and decreased expectations for most other advanced countries. In contrast, Spain is projected to grow by 2.5% this year, up slightly from the earlier forecast of 2.3%. This marks the second consecutive year that Spain will lead advanced economies in terms of growth rate.
Part of the increased forecast for this year can be attributed to the sustained growth momentum carried over from last year. During that period, Spain experienced faster economic expansion compared to other wealthy nations due to a surge in tourist inflows and improved employment rates which helped reduce its historically high joblessness levels. This was highlighted by Petya Koeva Brooks during a panel discussion after the release of the report at the International Monetary Fund.
Portions of this upgrade can be attributed to robust service sector exports along with significant growth in employment," Koeva Brooks stated. "Some of these improvements were also linked to migration.
Still, Spain–which is less exposed to goods tariffs than European neighbors like Germany or Italy– is at risk from the uncertainty the trade policy entails, she said. “[But] underlying strength is kind of having a bigger impact in the near term,” Koeva Brooks said.
Pantheon Macroeconomics' Melanie Debono noted in a report that economic expansion may decelerate due to these trading challenges.
“I believe investment is probably going to slow down significantly due to the increase in economic uncertainty. This rise in uncertainty is expected to have more impact than the positive effect on capital spending from the ongoing decrease in interest rates,” she stated.
In the meantime, consumer prices increased by 2.2% compared to last year this month, according to separate EU-standard data. This figure matches what was recorded in March and suggests that annual inflation within the broader 20-nation Eurozone will likely keep declining towards the targeted levels, potentially leading to further reductions in interest rates by the European Central Bank.
Tariffs will be "unequivocally recessive," according to ECB board member Piero Cipollone during his address in Frankfurt on Tuesday. Additionally, although the effect on pricing is harder to gauge, exchange rate dynamics might contribute to keeping inflation down, he noted.
"What we're witnessing isn’t just a fleeting disturbance; rather, it’s a significant change in the way countries engage with each other economically, financially, and politically," stated the policymaker.
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