Spain on the brink: Falling productivity threatens economic growth

30, Jul - BLOG

Many analysts of the Spanish economy are focusing their efforts on productivity, an economic concept that seems to hold all the keys to explaining Spain's lower potential growth compared to its European neighbours. Spain's GDP has recovered from the pandemic, gaining strength against major economies like France and Germany. But there is a structural problem in the background, as the Institute for Economic Research (IEE) explains: GDP per employed person, that is, everything that a company and workers are able to produce with the resources at their disposal.

The problems of the Spanish economy

In the last five years, the GDP per employed person has fallen by 1.9 points compared to an increase of 1.3 points in the European Union, and in the last decade this component has grown at half the rate (4.2 versus 8.1) of European countries. Another factor destabilising the fundamentals of the Spanish economy is the underutilisation of human capital. The unemployment rate in relation to the active population is the highest on the continent, which particularly affects young people and the generation approaching retirement. These two aspects determine the direction of the Spanish economy, which is based on the mass incorporation of the population rather than on qualitative improvements in production, explain Iñigo Fernández de Mesa, president of the think tank associated with CEOE, and Gregorio Izquierdo, CEO.

The periods of economic growth, most notable between 1995 and 2007, were based on massive labour recruitment. It was the incoming foreigners and, to a lesser extent, women who gradually entered the labour market that drove the growth of the Spanish economy. On the one hand, this reduced very high unemployment, but when the crisis hit, many of the jobs created proved to be the weakest link. And, after all, with this growth model, it is difficult to keep up with the European pace in terms of per capita wealth.

A clear path to the low-emission zone

The symptoms of the state of the economy are clear: high unemployment and the paradox that productivity only rises when employment falls significantly, as it did during the Great Recession. Despite the fact that Spain has a larger working age population relative to the total population and works more hours than the eurozone average, its employment rate is 70%, well below that of the major European economies (75%), with the exception of Italy.

Real GDP per hour worked, i.e. the productivity of labour for each hour worked, is far from what it could be and has performed below the European average in recent years. GDP per capita in Spain is now at the same level as it was in the 1970s or mid-1990s, after growing barely four-tenths faster than in the EU since 2013.

The progression of income per capita is falling

Regarding the convergence of EU per capita income between 2013 and 2023, it is clear that, in general, the countries with the highest per capita income progression were also the countries with the lowest relative per capita incomes. Thus, countries such as Ireland in the west and Romania, Poland, Croatia, Bulgaria, Malta, Hungary, Lithuania, Cyprus and Latvia in the east have advanced in the process of real convergence.

‘But this is not the case for Spain,’ stresses the IEE, “which, despite its lower income level, has not been able to make a significant difference in the growth of its per capita income compared to the EU,” the organisation explains. The proposal of Second Vice-President and Employment Minister Yolanda Dias to reduce the working week to 38.5 hours and then to a maximum of 37.5 hours would lead to ‘a decrease in labour productivity per worker and, consequently, a decrease in economic competitiveness and the ability to create jobs and grow the economy in the medium and long term’.

Regions with positive dynamics

The experts also elaborated on the different regions, highlighting four that have made progress over the past decade. "In a context of sluggish income growth compared to the EU, it is important to recognise the positive contribution of those regions whose per capita income grew higher than the EU between 2013 and 2024, namely: Galicia, the Community of Madrid, Valencia, Murcia and the Basque Country,’ the IEE emphasises in its report as a positive note in the balance.

The four Spanish regions with the highest living standards exceed the EU average per capita income over the last year are the Community of Madrid (€38,061 per year), the Basque Country (€35,437), the Autonomous Community of Navarra (€33,000) and Catalonia (€31,719). In addition, these four regions coincide in having the highest labour productivity (GDP per hour).

‘From a financial point of view, it is much better to converge with the best practices of the most developed regions in Europe in order to get closer to their productivity and living standards,’ they emphasised in the document and in the presentation. In this sense, Spanish regions, which have developed less competitive tax systems over the last decade, in turn have lower per capita income, confirming the close relationship between these two variables, the IEE noted.