Spain's economy: why incomes lag behind growth

Why Spain has been outgrowing the rest of Europe

The Spanish economy has grown faster than its European peers for several consecutive years, and the OECD's 2025 assessment attributes that to four things arriving together: strong private consumption on the back of a growing workforce, a recovery in tourism, investment financed by European recovery funds, and higher government spending.

The projection is for growth of 2.9% in 2025, 2.2% in 2026 and 1.8% in 2027, with domestic demand as the driver and export growth slowing as trade uncertainty and tariffs reduce demand from trading partners.

The current account has moved into a widening surplus, supported by services exports rather than goods, and the post-pandemic recovery has been unusual for Spain in a specific way. Previous Spanish recoveries were driven by construction and financed by foreign capital; this one has produced broad-based job creation, rising productivity and a reduced reliance on external financing.

What migration is actually doing to the figures

The headline growth figure and the figure per person tell different stories, and the difference is migration.

Output per person has expanded much more slowly than output overall, because the population has grown strongly through migration. The OECD's calculation is that migration contributed around 0.7 percentage points to annual growth in output per person between 2022 and 2024, by expanding the labour supply and staffing sectors that could not otherwise recruit.

That makes the Spanish position close to the opposite of the one usually assumed. A country with 10.4% unemployment in 2025, the highest among its European peers, is simultaneously dependent on inward migration to fill jobs, because the unemployment is concentrated in places, ages and skill profiles that do not match the vacancies.

The demographic arithmetic behind it is unforgiving. The population is ageing rapidly, employment among older workers is low, and the OECD's recommendation is to reform non-contributory unemployment assistance and expand adult learning to keep people in work for longer, alongside aligning migration policy with what the labour market actually needs.

Why unemployment stays high in a growing economy

Spanish unemployment has fallen to what the OECD describes as historically low levels for Spain and remains the highest in its European comparison group. Both statements are true and the gap between them is the country's oldest economic problem.

The share of temporary contracts has also fallen to a historic low, which matters because a labour market segmented between permanent staff with strong protection and temporary staff with almost none was the mechanism that produced Spain's characteristic pattern: employment collapsing in every downturn and recovering slowly.

Two further features show in the data. Overall employment rates remain below OECD averages despite recent increases. And temporary sick leave has risen everywhere, but Spain has seen a 52% increase in long-duration and repeat cases since 2018, which the assessment links to healthcare capacity and to the oversight of certification.

The recommended remedies are unglamorous: better active labour market policy, stronger regional employment offices and a training system that produces what employers are hiring for.

What the country sells and to whom

Spain's export base is broader than the tourism reputation suggests, and services have been carrying the external accounts.

Goods exports run on vehicles and components, machinery, chemicals and pharmaceuticals, and food. Agriculture is large by European Union standards on several measures and supplies a very substantial share of the fruit and vegetables consumed in northern Europe through the winter, grown under plastic in the south-east on some of the driest land in the country.

Services are where the surplus comes from. Tourism is the largest single component, and Spain is among the two or three most visited countries in the world in most years. Business services, engineering and construction abroad make up much of the rest: Spanish firms hold major positions in international infrastructure concessions, in banking across Latin America, and in renewable energy development worldwide.

Energy is the sector that has changed fastest. Spain has built out wind and solar on a peninsula with the resource for both, and its electricity system has run for extended periods on renewable generation alone. The constraint now is interconnection: the Pyrenees carry very little transmission capacity, so the Iberian peninsula operates closer to an electrical island than any other part of the continental grid, and cheap Spanish generation cannot always reach the markets that would pay for it.

Why productivity is the binding constraint

The OECD's central finding is that income convergence with the best-performing member countries remains limited, and that productivity growth is the reason.

The diagnosis names the structure of the business sector. Spanish firms are small: a very large share of employment sits in enterprises that never grow past a threshold at which they would face heavier regulatory and reporting obligations, and the incentives around those thresholds discourage the expansion that raises productivity.

The recommendations follow from that: improve access to market-based finance rather than bank lending, ease regulatory burdens on growing firms, simplify access to public research funding, and push adoption of advanced digital tools.

The fiscal side runs in parallel. Public finances have improved and debt is on a declining path, and sustaining that requires rebalancing tax revenue towards less distortionary taxes, containing pension costs in an ageing population, and prioritising spending that raises growth rather than spending that maintains consumption.

What housing and climate now cost

Two constraints appear in the 2025 assessment that would not have appeared in earlier ones.

Housing supply is named directly as a structural reform priority. Spain built enormously through the boom that ended in 2008, stopped almost entirely afterwards, and has not resumed at a rate matching household formation in the cities where the jobs are. The resulting cost of housing acts as a brake on labour mobility, which in a country with regionally concentrated unemployment is a direct constraint on employment.

Climate exposure is the other. Spain is highly exposed to extreme weather, and the assessment calls for targeted investment, better land-use planning and stronger flood protection. That is a statement about capital spending rather than about environmental policy: the events in question damage infrastructure and housing that then has to be rebuilt, and the planning decisions that put buildings in the path of them were made decades ago.

Decarbonisation carries its own investment requirement, in low-carbon transport, in electricity grid infrastructure and in storage, the last of which is the constraint on a system already generating more renewable electricity than it can always use.

What tourism has become and what it costs

Spain is among the two or three most visited countries in the world in most years, and tourism has moved from being a source of foreign exchange to being a structural feature of whole regional economies.

The scale creates two problems that a smaller sector would not. The first is seasonality and its effect on employment: a workforce hired for a season is a workforce that cannot plan, and a coast built for July carries a population that has to find something else to do for eight months. The second is housing, where short-term letting competes directly with residents in exactly the places with the least spare stock.

The reaction has been visible. Demonstrations against the level of tourism took place in the Canary Islands in April 2024, with thousands protesting in the archipelago, and comparable protests followed in Barcelona, the Balearics and elsewhere through 2024 and 2025. The demands were not for tourists to stop coming; they were about housing costs, water use and the share of the proceeds that stays locally.

Policy responses have run from tourist taxes and caps on short-term lets to restrictions on cruise arrivals and on new hotel licences, applied by municipalities and regional governments rather than nationally, which follows from the way competences are distributed.

Why Spanish farming depends on scarce water

Spanish agriculture is large by European Union standards on several measures, and it is grown substantially where the rain is not.

The south-east produces a very large share of northern Europe's winter fruit and vegetables under plastic, in a semi-arid region using irrigation drawn from aquifers and from transfers between river basins. Andalusia grows most of the world's olive oil. Both depend on water allocations that were set when the rainfall record looked different, and the country has been in recurrent drought for much of the past decade.

Inter-basin transfers are among the most contested subjects in Spanish domestic politics, because they move water between autonomous communities with their own governments and their own farmers. Desalination has expanded substantially along the Mediterranean coast, and the plants along that coast now convert a water problem into an energy problem.

The same land carries the wind and solar fleet, and the competition between agriculture and generation for flat sunny ground is now a planning question in several communities.

How the regions differ

Spain's economic geography is uneven enough that national figures conceal most of what is happening.

Madrid and Catalonia together account for a disproportionate share of output, the Basque Country and Navarre have industrial economies and the highest incomes in the country, and the Mediterranean coast and the islands run on tourism, construction and agriculture. Parts of the interior have among the lowest population densities in Europe and have been losing people for seventy years.

That divergence interacts with the political structure. Autonomous communities run health, education and much of social policy on financing determined largely at the centre, and the argument about how those transfers are calculated is permanent. The Basque Country and Navarre collect their own taxes and remit an agreed quota instead, which is a materially different arrangement and a standing reference point in every negotiation about the rest.

Regional analysis published by Spanish banks tracks growth community by community, and the dispersion between the fastest and the slowest in any year is wide enough that a single national growth rate describes very few of them.

The depopulation of the interior has become a political category of its own. A band running through Castile, Aragon and Extremadura has population densities comparable to the emptiest parts of Scandinavia, produced by seventy years of migration to the cities and the coast, and the towns left behind have an age structure that cannot sustain a school or a health centre. Parties formed specifically around that constituency have won parliamentary seats, and the subject now has a place in every national budget negotiation.

The counterpart is congestion. Madrid has grown continuously and the Mediterranean arc with it, so the same country contains regions that cannot fill a classroom and regions that cannot house a teacher. Every instrument for addressing either, from transport investment to tax incentives to the location of public bodies, is decided partly at national level and partly by seventeen governments with their own priorities.