Spain's economy grows in the third quarter but then slows before the holiday season.

The Spanish economy continued to grow in the third quarter of the year, with gross domestic product (GDP) increasing by 0.3% quarter-on-quarter in the summer. This means that many experts who predicted that the economy would even shrink and move into negative territory have been proven wrong.

Data from the National Institute of Statistics

The economy has held up in the face of international uncertainty, lower exports of goods, reduced activity in manufacturing and the impact of persistent inflation and rising interest rates on household and business incomes, according to data released Friday by the National Institute of Statistics. However, it slowed from the second quarter, when growth was 0.4%, and from the first quarter, when it was 0.6%. This is the weakest quarterly growth since the first quarter of last year, when it was 0.2%.

GDP grew 1.8% from a year ago, narrowing the gap from the previous quarter when it was 2% and the weakest growth rate since the pandemic began. However, the Spanish economy had already accumulated growth of 2.3% compared to the last quarter of 2019, before COVID-19.

Good employment data

The good employment data released by INE on Thursday indicates that growth should be greater than originally thought, because if companies are still hiring, that means their activity is growing and GDP is growing, unless productivity has experienced an incomprehensible downturn (i.e., if hired workers can't keep up the pace of production).

Domestic demand, which includes household consumption, business investment, and government consumption, was the main reason for economic growth this quarter, contributing 1.65 points to annual growth.Of particular importance was household consumption, which rose 1.4% over the quarter thanks to increased purchasing power (wages are already rising above inflation this year) and increased employment, which increases the number of households with jobs and a source of income.

The uncertainty caused not only by economic tensions, but also by the context of holding parliamentary elections during this quarter without obtaining a stable majority, affected investment, which declined compared to the previous period. Fixed assets (which measure what companies spend on buildings, machinery and equipment) fell 0.4%, due to a decline in real estate purchases (-2.2%), although purchases of machinery rose 2% and purchases of patents and other intellectual property products rose 1.1%.

Services drive growth

Analyzing the structure of the economy by sector (in terms of supply), the largest contributors to growth were the manufacturing industry (a sector of industry that includes, for example, the automotive industry, which is doing very well and continues to export at a steady pace) and services.

Although industry as a whole contributed 0.6% less than in the previous quarter, manufacturing grew 0.8%; agriculture declined 3.4% quarter-over-quarter due to drought and flooding; construction fell 0.6% in the first contraction from January through April 2022; and services grew 0.9%.

Services traded 3.6% more than last year, with tourism and non-entertainment services (consulting, telecommunications, logistics, transportation, financial services, etc.) maintaining a positive balance of trade. The decline in exports is negative for Spain because all its growth depends on domestic demand, but the fact that services partially offset the decline in goods is positive because it keeps the external sector positive for growth (it added 0.16 this quarter).

Higher interest rates and the rising cost of mortgages led to lower home loan sales, so the sector cooled, and real estate activity is the only one that showed a decline from the second quarter: 1.3%.

The Ministry of Economic Affairs, which is headed by Nadia Calvio, called the data "notable (...) in a context of high international uncertainty and rising interest rates" and noted that "these data confirm the difference in growth of the Spanish economy compared to the main eurozone countries and are in line with the macroeconomic projections included in the budget plan".

The data released on Friday are only preliminary and should therefore be taken with caution. In fact, INE warns that "due to the difficulties involved in statistically measuring changes in conjuncture in a context such as today's, still overshadowed by the high uncertainty caused by the possible effects on the economy of the international context (the war caused by the Russian invasion of Ukraine, the rapid tightening of monetary policy in recent periods, high price volatility, etc.), it is predicted that future revisions to today's results may be larger than usual." Thus, they caution that this result could be significantly different after the Dec. 22 revision, as has already happened in other cases.