The Spanish islands experienced a real economic boom in 2023 thanks to the powerful recovery of international tourism that occurred last year. A boost that has been reflected in its GDP data. The Balearic Islands —whose economy expanded by 4.2% last year— and the Canary Islands (3.8%) expanded their activity well above the national average of 2.5%.

This is reflected in the estimate of the composition of the national GDP by autonomous communities that the Airef published this Thursday on its website.. Based on the figures published by the tax authority, there were only four communities that grew above the country's average. Completing the list, beyond the islands, are Madrid – with GDP growth of 3% – and Catalonia, which registered an expansion of 2.7%.

In any case, the progress of the economy last year was considerable throughout the territory, with most communities growing above 2%. Above or equaling this reference are Andalusia (2.4%), the Basque Country (2.2%), Castilla y León (2.2%), Aragón (2.1%), La Rioja (2.1% ), Galicia (2%), Valencian Community (2%) and Navarra (2%). On the other side of the spectrum are Cantabria (1.9%), Murcia (1.9%), Castilla-La Mancha (1.7%), Asturias (1.7%) and Extremadura (1.7%).

These figures have been prepared with the same method with which national growth data is usually calculated.. That is, comparing the average of the four quarters of 2023 with the four of 2022 in percentage terms.

Recovery at different speeds

The strong growth registered on the islands is an obvious consequence of the recovery of foreign tourism. These two territories are, by far, the most dependent on the spending of international travelers. It has not been until 2023 when the sector has recovered the figures it managed in 2019. In 2022, foreign tourist arrivals were still 14.3% below the pre-Covid level.

It must be taken into account that the Balearic and Canary Islands have not closed the wound that the pandemic opened in their economies until 2023, precisely because they were missing the key piece of their productive fabric.. However, these two territories were not the only ones that recovered last year.. Castilla y León, Asturias and Extremadura also had to wait until the previous year to return to their 2019 GDP level.

Madrid is the CCAA that has grown the most since 2019

The balance by autonomies four years after the pandemic is uneven. While territories like Madrid have an economy 5% larger than at the end of 2019, for communities like Asturias or Extremadura the last four years have been a lost period.

The Madrid economy is the one that has grown the most since 2019, followed by Murcia, which occupies second place with 4.2%. The podium is closed by the Valencian Community and Cantabria, with a GDP level that is already 3.2% higher than before the pandemic. For its part, the Andalusian GDP is now 3% larger than at the end of 2019, while the Catalan economy has advanced 2.3% since that date.

In the group of communities that have moved the least from the starting box since the pandemic arrived, data such as the Balearic Islands (1.7%), Castilla y León (1.1%), the Canary Islands (1, 1%) and, above all, those of Asturias (0.4%) and Extremadura (0.2%).

The shock that the pandemic meant for the Spanish economy has accentuated the gap in growth that opened years ago between the most thriving territories and the most lagging ones.. Since the beginning of the 21st century, the Community of Madrid is the territory that has expanded the most. The Madrid economy is now 63.3% larger than in 2000, a growth speed that almost triples that of Castilla y León, and exceeds the national average by 20 points.

Among the most populated territories, Catalonia is the second autonomy that has grown the most this century, with a cumulative advance of 44.6%, practically in line with the national average.. Andalusia occupies the third step, with a GDP increase of 39.8% in that period, while the Valencian Community registers a GDP increase of 38.6%.

The eurozone has cautiously returned to the path of price moderation at the beginning of 2024, with a slight decrease to 2.8% in the annual variation rate of the CPI. However, the slowdown has not been uniform across all the partner states of the single currency. According to harmonized data released this Thursday by Eurostat, inflation in Spain has increased by two tenths in January, reaching a rate of 3.5%, which moves the country further away from the European average.

The CPI variation rate in the eurozone has moderated in January by one tenth, compared to the 2.9% recorded in December, although it is still above the 2.4% registered in November, which was the lowest figure since July 2021. In the last month of 2023, inflation broke the downward trend that had been ongoing for thirteen months (except for April), after reaching its peak in October 2022 with a rate of 10.6%. In the past 31 days, prices have fallen by 0.4% compared to the level at the end of the previous year.

The behavior of inflation in the eurozone in January has been influenced by the drop in the price of energy, which is now 6.3% cheaper on average compared to a year ago. When excluding the impact of energy, the rate is reduced to 3.8%, down from 4% in December. On the other hand, unprocessed foods have become more expensive by 7% in the last year, which is two tenths higher than the previous month. However, when excluding both energy and unprocessed food from the calculation – as they are characterized by their price volatility – underlying inflation in the eurozone has moderated for the tenth consecutive month, recording a decrease of three tenths to an interannual rate of 3.6%, its lowest level since March 2022.

The moderation of prices in the eurozone contrasts with the increase in inflation registered in Spain, where the year-on-year variation rate of the CPI grew by two tenths in January to 3.5%, according to harmonized data from Eurostat (still provisional). Therefore, the Spanish index is now seven tenths above the eurozone average, after returning in January to the level recorded in October, following two months at a rate of 3.3%.

In the absence of final data, the National Institute of Statistics (INE) attributed the rise in inflation in Spain to the reduction in tax reductions implemented by the government in the price of electricity, which has led to an increase in its cost. Starting from January 1, VAT on electricity increased from 5% to 10%, as an intermediate step before returning to the original rate of 21%. Similarly, the electricity tax has increased from 0.5% to 2.5%, and it will continue to rise in the coming months — reaching 3.8% in June and returning to the original 5.11% in July.

Among the four largest European economies, Spain has the highest inflation rate, although prices have also accelerated in Italy in January, with a rise of four tenths, bringing the interannual rate to 0.9%. On the other hand, inflation has moderated in Germany and France by seven tenths, standing at 3.1% and 3.4%, respectively. In both cases, these figures are above the eurozone average.

Therefore, with the exception of Italy, the data for the major European economies are still far from the ECB’s 2% inflation target. The European Central Bank (ECB), headed by Christine Lagarde, closely monitors the evolution of inflation in the eurozone partner states to determine the course of monetary policy. In its recent meeting, held last week, the ECB decided to keep interest rates unchanged at 4.5% for the third consecutive time. Lagarde explained to the media that it is still premature to discuss a rate cut, although she had previously acknowledged that it is “likely” that the first easing measures will be implemented in the summer.

The government’s forecast for this year is that the Social Security Reserve Fund will reach 9,000 million euros, according to the Minister of Inclusion, Social Security and Migration, Elma Saiz. The fund will continue to grow throughout 2024 and beyond, with the goal of exceeding 25,000 million euros at the end of the legislature. This growth is supported by the Intergenerational Equity Mechanism, which involves additional contributions from both employers and workers. The fund’s growth is seen as a positive sign of the strength of the pension system and provides confidence and certainty to citizens, according to Saiz.

The Intergenerational Equity Mechanism will continue to increase the contributions over the next few years, reaching 1.2% by 2029. This mechanism aims to reinforce the income of the pension system. The government projects that the fund will surpass 25,000 million euros by the end of the legislature, its highest level since 2015. It is worth noting that the reserve fund reached its peak in 2011 at 67 billion euros but has significantly decreased since then, hitting a low of 2,138 million euros in 2020.

While the fund’s growth is a positive development, pension spending has also increased, particularly due to the revaluation of payments with the CPI to maintain the purchasing power of pensioners. The pressure on the system will intensify in the coming years as the baby boom generation reaches retirement age. The minister emphasizes that the reserve fund will be an important resource to address temporary imbalances between income and expenses in Social Security.

Saiz also highlights the strength of the Spanish labor market, with over 530,000 jobs created in 2023, reaching a total of 20.8 million employed individuals. She states that there have never been so many people working in the country, with a ratio of 2.4 contributors per pensioner. Additionally, the minister highlights the importance of promoting partial retirement and working on a new regulation regarding the compatibility between work and pension. The aim is to encourage a gradual and voluntary exit from the labor market while addressing the issue of early retirement in challenging professions.

The European Investment Bank (EIB) has initiated the process of mobilizing the initial 3.6 billion euros of loans as part of the recovery plan to fund regional investment projects. Nadia Calviño, the president of the bank and former first vice president of the Government, made this announcement while presenting the EIB’s 2023 results at the European Commission headquarters in Spain. While the institution has taken the first step, the signing of agreements to define the management of these funds is still pending.

It is the intention of the EU public bank to deploy these loans throughout 2024. However, this is contingent upon the completion of new budgets by the Government, a process that is currently delayed and complex. Calviño emphasized that governmental approval is crucial as public accounts serve as the means to channel European funds and determine the framework for the implementation of these loans.

The allocated 3.6 billion euros are part of the 20 billion euros regional resilience fund dedicated to investing in regional projects centered on social and affordable housing, sustainable transportation, industrial competitiveness, and sustainable tourism. While these loans offer favorable conditions, including extended repayment periods and lower interest rates compared to market rates, they are not as advantageous as the non-refundable aid that has been the main focus of the recovery plan thus far.

No specific details have been disclosed by the EIB regarding the projects that will be financed with the initial tranche of the fund. The responsibility of defining these projects lies with the central government and the autonomous administration, who must reach an agreement. The EIB, under Calviño’s management, will participate in governance and provide assistance.

In total, Spain will receive approximately 83 billion euros in loan financing from the recovery plan, with the EIB managing a quarter of the amount allocated to the regional fund (20 billion euros). These funds must be allocated to definitive projects by August 31, 2026, at the latest, or risk being lost.

The significant increase in interest rates by the European Central Bank (ECB) since 2022 has impacted the effectiveness of this financing vehicle. When the mechanism was designed, interest rates were close to zero, making financing highly affordable. However, with current historically high interest rates, borrowing costs have substantially increased, making the investment less attractive.

Nevertheless, the EIB remains optimistic about the demand for these loans. The European public bank anticipates a reduction in interest rates by 100 to 150 basis points in the second half of this year. Such a reduction would result in rates decreasing from the current range of 4% to 4.5% to 2.5% to 3% in the best-case scenario.

The EIB invested 11.4 billion euros in Spain in 2023.

In 2023, the EIB allocated a total of 11.4 billion euros to Spain, accounting for 13% of the bank’s overall financing during that year. The majority of the resources, approximately 6.8 billion euros, were directed towards projects in the energy sector and the green transition.