Spain’s Private Sector Growth Slows Amid Trade Headwinds and Manufacturing Woes

The latest data from Spain’s private sector activity in April 2025 paints a picture of resilience in services but vulnerability in manufacturing, with trade tensions and global uncertainties casting a shadow over growth prospects. While the economy remains in expansion territory, the slowdown underscores the fragility of a recovery still grappling with external headwinds. Investors must now weigh whether Spain’s services-driven momentum can offset manufacturing’s struggles—or if the sector’s contraction signals deeper risks ahead.

Services Sector: Growth Eases, but Hiring Persists

Spain’s services sector, the engine of recent economic activity, showed signs of cooling in April. The Services Purchasing Managers’ Index (PMI) dipped to 53.4, marking the slowest pace of expansion since late 2023. New orders grew at a weaker rate, with firms citing “softer gains” in demand. Yet, cost pressures remained stubbornly high: trade tariffs and rising wages pushed input prices to elevated levels, forcing businesses to pass along higher costs to consumers—a trend that risks fueling inflation.

Despite the slowdown, services firms continued to add jobs, driven by growing order backlogs. Employment in the sector rose for the fifth consecutive month, though optimism among business leaders hit its lowest point of the year. “Uncertainty around U.S. tariffs is paralyzing decision-making,” one respondent noted. This caution underscores a broader theme: global trade frictions are no longer just a geopolitical issue but a tangible drag on corporate planning.

Manufacturing: A Sharp Turn for the Worse

The manufacturing sector, however, is in free fall. The Manufacturing PMI plummeted to 48.1 in April—the lowest since early 2024—marking its third straight month of contraction. Output dropped for the first time since August 2024, as new orders fell sharply, particularly in export markets. The data reveals a crisis of confidence: U.S. tariff uncertainties have left manufacturers in a holding pattern, with export orders contracting at the fastest rate since late 2022.

Input costs rose modestly due to supply chain disruptions, but competitive pressures kept selling prices flat. Hiring stalled entirely, with employment flat for the fourth month in a row. The sector’s outlook is bleak: the future production index hit its lowest level since August 2024, suggesting firms are bracing for further declines.

The Composite Picture: Services Hold Up, But for How Long?

The Composite PMI, which aggregates services and manufacturing, fell to 52.5—a 1.5-point drop from March. This mixed outcome highlights the tension between sectors: services remain a lifeline, but manufacturing’s struggles are now undermining broader momentum. Spain’s government forecasts 2.6% GDP growth for 2025, relying on services’ resilience and earlier manufacturing gains. Yet the current data suggests risks to that outlook.

Underlying Drivers: Trade, Tariffs, and Global Uncertainty

The report points to U.S. tariffs as the dominant factor stifling demand. Companies across sectors reported postponed investments and consumption decisions, with manufacturing exports bearing the brunt. Geopolitical tensions and market instability further dampened confidence, pushing business optimism to precarious lows. Meanwhile, supply chain disruptions from tariffs are compounding cost pressures, even as pricing power remains constrained in manufacturing due to fierce competition.

What This Means for Investors

The divergence between Spain’s sectors creates both opportunities and pitfalls. Services-oriented companies, particularly those in tourism, healthcare, and logistics, may still benefit from steady demand, even at a slower pace. Investors might consider exposure to firms like Amadeus IT Group (AMS.MC), a travel tech giant, or Cellnex Telecom (CLNX.MC), which provides critical infrastructure for digital services.

Manufacturing, however, is a cautionary tale. Sectors tied to global trade—such as automotive or industrial goods—face headwinds. Inditex (ITX.MC), Spain’s fashion giant, may struggle if tariffs disrupt its supply chains, while Repsol (REP.MC) could see energy-related exports hit by geopolitical volatility.

The broader market is also under pressure. Spain’s IBEX 35 index has underperformed the Euro Stoxx 50 year-to-date, reflecting sector imbalances. Investors should monitor the index’s performance for clues on whether sentiment is stabilizing or deteriorating further.

Conclusion: Navigating the Crosscurrents

Spain’s economy is at a crossroads. While services are holding up, manufacturing’s collapse and the drag from trade tensions demand caution. The 2.6% GDP growth forecast hinges on a rebound in manufacturing—a scenario that now seems increasingly unlikely without a resolution to tariff disputes.

The data also reveals a stark divide in corporate strategies: services firms are hiring to meet backlogs, while manufacturers are holding back on investments and staff. This could lead to a bifurcated labor market, with job growth concentrated in sectors insulated from global trade—a trend investors should track closely.

For now, the key question is whether U.S. tariffs will ease or worsen. If the latter, Spain’s manufacturing sector may face further contraction, trimming GDP growth and weighing on equities. Investors would be wise to favor services-driven companies and avoid sectors exposed to trade risks—until the clouds on the horizon begin to lift.

In the end, Spain’s story is a microcosm of the global economy: growth is possible, but only if the world’s trade arteries can flow freely again.