Why is Spain’s economy going well?

Spain’s booming economy is overtaking European neighbours as tourism, foreign investment and immigration help fuel growth.

Southern European countries are still growing in the eurozone, with annual gross domestic product expected to increase by 2.5% this year, while the economies of France, Germany and Italy are projected to expand by 0.6%, 0% and 0.7% respectively.

Spain’s GDP surpassed expectations in the second quarter, up 0.7% and surpassed Reuters forecasts of 0.6%. Data from the Spanish National Institute of Statistics (INE) also showed growth was higher than in the past three months.

“For the second year in a row, we will be the most advanced economy number one in terms of GDP growth,” Spanish Finance Minister Carlos Querpo told CNBC in April.

“Spain is now a great outlier in terms of growth and is also a great place to invest,” he added.

The success of the Spanish economy depends not only on tourism, next-generation European funding, immigration, but also on high consumption and investment, and immigration.

“It’s not just tourism, it’s also a non-tourism service. It exports more in terms of services, accountability services and financial services to businesses like tourism. It exports in terms of tourism – 100 billion euros ($116.8 billion) in terms of 100 billion euros ($116.8 billion).

Despite this economic growth, some challenges await Spain, including rising costs of living, climate change, the ever-divided political scene, and maintaining payments in line with the fact that the country has the highest youth employment rate in the EU.

“What will happen with tariffs and international trade, especially in an economy like Spain, where exports of goods have increased significantly over the past 15 years?” Cardoso said.

“The second challenge is that the savings rate remains relatively high. The third source is this low investment rate. Finally, how to reduce government deficits and public debt.”

Still, Spain’s tourism accounts for around 12% of the country’s GDP, as it benefits from the pandemic rebound compared to other Western European countries.

The success of the sector has sparked backlash from the community, particularly during its peak summer months, about an influx of people visiting historic and popular sites. Last June, Barcelona protesters were seen spraying water guns on tourists and yelling “Tourists are going home.”

The sector can also expect an increase in the workforce of around 3 million people as of 2024, a 9.7% advance compared to 2023.

Job creation is also supported by high immigration. Spain plans to welcome around 1 million immigrants over the next three years while other European countries are closing their borders. Through the grant of work visa schemes and residence permits to undocumented workers.

“90% of the labor force increase since 2021 is due to immigration,” Miguel Cardoso, chief economist at BBVA Research, told CNBC.

“This allows the services sector to expand, which keeps businesses relatively competitive in terms of reducing labor costs and allows, for example, services to remain relatively restrained in a high inflationary environment.”

In Las’ year, most people who emigrated to Spain came from Colombia, Venezuela and Morocco.

“There is this push factor because Latin America’s economy is relatively poorly doing well, as well as the fact that immigration to the US is becoming more difficult.

Spain’s economy is also strengthened by the European Union’s next-generation EU fund, with 163 billion euros now available through grants and loans. The country is the second largest beneficiary of this pandemic recovery support, after Italy.

Spanish Frogpo told CNBC that 70% of the grant (55 billion euros) has already been diversified.

“This was a programme that was partially designed to help with recovery after the pandemic,” Cardoso said.

“Therefore, the government prioritizes investment projects that it had already planned, and has a relatively low increase effect within the economy.”

Nevertheless, the Spanish government aims to use these funds in sectors such as exports of non-tourism services, including renewable energy.

Since investing in green energy in the 2000s, Spain has benefited from low energy costs and has found its impact less than the European energy crisis following the 2022 Russian invasion of Ukraine.

“The rise in renewable stocks in the electricity mix over the past five years implies a 40% decline in wholesale electricity prices over the past six years,” Cuerpo said.

Low production costs are an attractive standard for businesses, especially foreign investors, and are also supplied to the sector.

Founded in China in 2009, Photovoltaics Tracker Company Arctech opened its European headquarters in Madrid in 2024. The solar cell converts solar directly into electricity. This is a rapidly growing renewable energy source that could lead to reduced electricity costs.

“Spain is probably the European location where the most PVs were held,” Pedro Magalhaes, general manager of Arctech’s EU and NA Markets, told CNBC.

“The solar ecosystem is here, from junior engineers in fact (in Spain) to funds investing in these large assets.”

The company currently boasts 17 branches outside of China, and plans to expand in Eastern Europe and diversify into storage solutions.

“Things are happening here. We use the Port of Valencia to import and distribute them to many parts of Europe,” Magalges added.

Like Arctech, many foreign companies plan to take advantage of the country’s low energy costs.

Auto Giant Stellantis In late 2024, they announced plans to work with battery manufacturer CATL to build a $4.3 billion lithium phosphate battery plant in Zaragoza, northeastern Spain.

Foreign direct investment in Spain is also strong, with the country’s rankings being the fourth most attractive country in the EU for investors. China alone has declared that Spain will invest up to 11 billion euros in 2025.

“If we look at where that investment comes from, we are the biggest investor in Spain,” Querpo said.

“But we are also attracting investments in sustainable mobility from other parts of the world, including China, in certain sectors related to renewable energy. This is of course always part of the economic security agenda.”