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2025-02-14
The bond market bathes in the positive sentiment
Compared with many other countries in the single currency area, Spain's economic performance has been positive. In the fourth quarter of last year, for instance, growth of 0.8% quarter-on-quarter exceeded consensus expectations. On an annualized basis, Spanish output grew by 3.5% in the fourth quarter, implying an annual growth rate of 3.2% in 2024.[1] These figures are even more impressive given the devastating floods in the Valencia region, which might have been expected to reduce growth.
The Economist recognized Spain's positive development at the end of last year. The business magazine regularly publishes its own rankings of the best OECD countries, and in its latest edition Spain came out on top. The Economist's overall assessment of Spain's economic performance far exceeds that of other major OECD economies such as Canada (12th), the U.S. (20th) and Germany (23rd).[2]
The main drivers of the acceleration in growth in 2024 were the record number of foreign tourists, the fact that the hotel and restaurant industry was able to make up for the losses suffered during the Covid crisis, and the influx of immigrants who filled vacancies and at least partially offset the ageing of the population.
*Yield spread between ten-year Spanish government bonds and German Bunds in basis points
Sources: Bloomberg Finance L.P., DWS Investment GmbH as of 2/11/25
Overall, the labor market improved. A significant increase in hours worked was accompanied by a decline in the unemployment rate from 11.2% in the third quarter to 10.6% in the fourth quarter. The services sector, together with industry and agriculture, contributed significantly to the fall in unemployment, while employment in construction remained relatively stable. It should be noted, however, that the increase in employment in the fourth quarter was mainly due to part-time work and that productivity fell by 0.2% quarter-on-quarter.
The evolution of Spanish government bond spreads over Bunds shows that market sentiment towards Spain is also becoming increasingly positive. As can be seen in our chart of the week, the ten-year spread has narrowed from around 135 basis points to just under 60 basis points since the interim high in July 2022. Among the countries of the Eurozone periphery, only Portugal is lower. Even French OATs trade at a higher spread.
We expect the healthy labor market to continue to support consumption and investment well into 2025, thereby maintaining the positive growth momentum.
All economic and financial data – unless otherwise stated – from Bloomberg Finance L.P. as of 2/11/25
La Vanguardia as of 12/11/24
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