Economy

Spain and Portugal: The Iberian Economic Outperformance Continues

Spain and Portugal’s continued economic outperformance highlights their resilience and adaptability within a struggling eurozone. Their ability to maintain growth, reduce financial vulnerabilities, and improve labor market conditions position them well for sustained economic success. While challenges such as low...

05 Feb 2025 4 min reading

Spain and Portugal: The Iberian Economic Outperformance Continues
Spain and Portugal are poised to remain among the best-performing economies in the eurozone in 2025. Despite broader economic struggles in Europe, these two Iberian nations have demonstrated remarkable resilience, fueled by strong tourism, favorable demographic trends, and effective macroeconomic policies. Their recent performance, which includes a significant reduction in macro-financial vulnerabilities, has prompted economists to revise long-term growth expectations upwards.
Sustained Economic Growth and Outperformance
Spain emerged as the fastest-growing major economy in 2024, with GDP expanding by 3.2%, marking its second consecutive year of impressive performance. Portugal, despite experiencing a temporary slowdown in mid-2024, ended the year on a robust trajectory. Both nations have benefited from structural and cyclical factors that distinguish them from the rest of the eurozone.
Among the key contributors to growth are the service-oriented nature of both economies, a booming tourism sector, and increased net migration. Additionally, their energy markets, characterized by high renewable energy usage and reduced reliance on Russian gas, have helped them navigate the energy crisis more effectively than their European counterparts.
Divergent Growth Drivers
Despite their similar overall performance, Spain and Portugal have relied on different economic drivers. Portugal's growth has been largely driven by consumer spending and investment, while Spain's economy has leaned more on government consumption and net exports. This divergence reflects differences in domestic economic policies and sectoral strengths.
Macroeconomic Stability and Fiscal Responsibility
Both Spain and Portugal have made significant progress in reducing macro-financial vulnerabilities over the past decade. The large current account deficits that characterized their economies in the early 2000s have transformed into surpluses, driven by booming tourism and strong exports in high-value-added services such as technology and technical activities. As a result, their external debt levels have dropped to about 50% of GDP, nearly half of what they were a decade ago.
Portugal has achieved a fiscal turnaround, with its budget surplus expected to continue for a third consecutive year. The country’s fiscal discipline has improved investor confidence, leading to a significant narrowing of the spread between Portuguese government bonds and the German bund. Spain’s fiscal progress, while not as dramatic, has kept its deficit close to the eurozone average.
Positive Labor Market Developments
The labor markets in both Spain and Portugal have also strengthened in recent years. Portugal’s unemployment rate stood at 6.5% at the end of 2024, in line with the eurozone average. Spain, which historically had a much higher unemployment rate, saw a dramatic improvement, with unemployment falling to 10.6% from a peak of 26.3% in 2013. Employment growth in Spain has been particularly strong, contributing significantly to overall job creation in the eurozone.
Additionally, labor market reforms in Spain have improved job stability, reducing the share of temporary contracts. These developments indicate a shift towards more sustainable employment growth, which is crucial for long-term economic stability.
Long-Term Growth Outlook and Challenges
The outlook for Spain and Portugal remains optimistic, with forecasts now suggesting that both economies will grow at a pace like the eurozone average over the next decade. This is a notable upgrade from previous projections, which had placed them among the weakest performers.
One of the primary reasons for this upgraded outlook is the improved demographic trend. Both countries have experienced strong net migration, which is expected to continue. The influx of migrants, including skilled workers and digital nomads, has bolstered the labor force and mitigated concerns about an aging population.
However, challenges remain. The prevalence of low value-added jobs and weak productivity continue to hinder income convergence with the broader eurozone. While both economies have become more open to international trade, investment levels remain relatively low, limiting potential productivity gains. Additionally, structural issues such as policy uncertainty, regulatory risks, and high housing costs could deter foreign investment.
Conclusion
Spain and Portugal’s continued economic outperformance highlights their resilience and adaptability within a struggling eurozone. Their ability to maintain growth, reduce financial vulnerabilities, and improve labor market conditions position them well for sustained economic success. While challenges such as low productivity and investment levels persist, their strong fundamentals and favorable demographic trends suggest that Iberia’s economic renaissance is far from over.

Economy