The sluggish recovery of the Spanish economy: structural reforms are needed

Gonzalo de Cadenas Santiago, Deputy General Manager at MAPFRE Economics

The global economy is faced with a complex landscape, with increased tensions in the Middle East, weakened global growth, population aging, the development of new technologies... and Spain is by no means immune to these challenges. The country has been losing potential growth for over a decade, which we associate with the difficulties faced when it comes to growth and a downturn in productivity, which tend to be the cornerstone of all aspects related to the need for structural reforms.

However, in the new edition of our report “2024 Economic and Industry Outlook: updated forecasts for the second quarter”, MAPFRE Economics has improved the growth forecast for Spain in 2024 to 2.1%, compared to the forecast of 1.4% growth in January. Inflation will drop to 3.1% by year end before falling to 2.2% in 2025, much closer to the ECB’s target.

The base scenario for this forecast update remains framed by the controlled slowdown by central banks, key economic factors that support the slow but sustained drop in inflation and a risk map that calls for both extra caution and possible divisions as movements become less coordinated. Overall, however, the outlook for the global economy remains slightly more positive in terms of activity, with the forecast for the global economy improving by a further 0.3 percentage points in 2024 and remaining unchanged in 2025.

Focusing on Spain once again, and despite the positives that can be taken from this improvement in growth forecasts, significant work remains ahead of us in terms of the pension system, fiscal sustainability, employment, the education system, social welfare and housing, as well as other factors.

The pension system has been in the spotlight for years, especially when bearing the increase in life expectancy in mind. In Spain, average life expectancy now stands at 83.2 years and forecasts from the National Institute of Statistics (INE) suggest that it will continue to increase in the coming years. This means that work is needed to shore up the third pillar of the pension system and encourage private savings, thus ensuring the financial sustainability of the pension system while maintaining the purchasing power of pensions, preserving suitability, protecting against poverty and ensuring intergenerational equity.

This plan must be designed carefully to maintain fiscal sustainability, with a view to making the tax system more equitable, progressive, sustainable and fair, with an emphasis on green taxation and incorporating a gender perspective. The aim is also to increase income to support the sustainability of public finances in the medium and long term.

When it comes to employment, Spain needs to reduce structural and youth unemployment, reduce the use of temporary contracts, improve the duality of the job market, invest in human capital, modernize collective bargaining and improve the effectiveness of public policies.

At MAPFRE Economic Research, we estimate that unemployment will stand at 11.3% in both 2024 and 2025, well beyond the figures expected from our European neighbors. In fact, Spain has the highest unemployment rate in the European Union (EU) and the OECD, with the situation being particularly serious among the country’s youth.

What's more, we need to modernize the education system, improving educational infrastructure to create a more flexible and inclusive system that adapts to the needs of students, while introducing new teaching and learning techniques, including digital education.

When it comes to social welfare, we must guarantee adequate income support and reduce poverty taking the structural needs of vulnerable groups into consideration. The housing problem must be addressed as a matter of urgency, with measures aimed at supporting decent and adequate homes, while addressing the rehabilitation and improvement of housing, improving quality of life and ensuring affordable rental properties are available in sufficient numbers.

These reforms are consistent with the country-specific recommendations that have been made to Spain in recent years, with a focus on improving the labor market and performance in education, improving social welfare and ensuring the sustainability of taxation and the pension system. However, the implementation and effectiveness of these reforms has been mixed, with progress made in some areas while in others, there has been criticism due to the lack of ambition or for potentially heading in the wrong direction.

The European Commission has mostly approved of Spain's progress in their implementation, with certain exceptions, noting concerns about pension reforms and their sustainability. We simply must address all these areas and continue working on a path of sustainable growth, with a vision for the future while focusing on improving productivity, which has been stalling for too long.