Spain's economy outperforms; IMF urges fiscal, housing action

The International Monetary Fund's Executive Board concluded its 2026 Article IV Consultation for Spain on May 22, 2026. It noted Spain's robust economic performance but urged accelerated fiscal consolidation and new housing-related financial risk measures.

Growth defies global headwinds

Spain's economy has continued to outperform the euro area, with robust growth of 2.8 percent in 2025, driven by a pickup in domestic demand and investment.

Strong immigration has underpinned labor force gains, unemployment has slightly declined, and productivity growth has strengthened.

Despite these positive trends, headline inflation has proven sticky, hovering around 2.5–3 percent before the war in the Middle East due to persistent core and services inflation.

Public finances improved, with the deficit narrowing to 2.4 percent of GDP in 2025.

Systemic financial risks remain low, though rising house prices and early signs of easier lending standards could foster vulnerabilities.

Growth is projected to remain solid at 2.1 percent in 2026, before gradually slowing as demographic headwinds intensify.

Inflation is projected at 3 percent by end-2026, declining to 2.2 percent in 2027.

Risks to growth are predominantly on the downside, including from a prolonged Middle East conflict and domestic political fragmentation.

Rebuilding fiscal buffers

The International Monetary Fund (IMF) urged Spain to accelerate discretionary fiscal consolidation to rebuild fiscal buffers, citing strong growth, high debt, and rising aging-related spending pressures.

Key recommendations include phasing out recent energy support measures, except for narrowly targeted aid in severe scenarios, and considering further pension reform.

The IMF also suggested harmonizing VAT rates, paired with transfers to vulnerable households, to achieve consolidation in a growth-friendly manner.

To bolster credibility, the IMF highlighted the need for a fully-fledged medium-term fiscal strategy, a stronger role for the independent fiscal council, and alignment of subnational fiscal rules with the EU framework.

While systemic financial risks are low, the IMF noted potential risks from fast-rising house prices and easing bank lending standards, recommending the introduction of mortgage-related borrower-based measures, at least as supervisory guidance, in the coming year.

Unfinished reforms, looming challenges

Spain's impressive growth masks critical structural weaknesses, particularly in housing affordability and long-term productivity, which require decisive action.

While the IMF's recommendations are sound, their implementation faces significant political and social hurdles, potentially delaying crucial reforms.

Without decisive action on these fronts, the country risks undermining its recent economic gains and exacerbating future financial vulnerabilities.