Spain's Inflation Surge and Its Implications for Equities and the Current Account

Spain's economy in 2025 is navigating a complex landscape of inflationary pressures, sectoral resilience, and external imbalances. While domestic demand and structural reforms have driven growth, the country's current account and trade dynamics remain under strain. For investors, the challenge lies in identifying sectors that can weather inflationary headwinds and currency pressures while capitalizing on long-term structural trends.

Inflation: A Tale of Two Forces

Spain's inflation rate stabilized at 2.7% in August 2025, held in check by offsetting forces: rising fuel prices and falling electricity and food costs according to CaixaBank research. Core inflation, at 2.4%, reflects persistent demand-side pressures, particularly in fresh food and energy according to CaixaBank research. This duality underscores the uneven impact of inflation across sectors. For equities, this means divergent performance: energy-dependent industries face margin compression, while sectors insulated from energy costs-such as construction and consumer goods-may benefit from stable input prices according to CaixaBank analysis.

The labor market, however, remains a bright spot. Social Security affiliates grew by 2.3% year-on-year, with construction adding 3.5% more jobs according to CaixaBank research. This suggests that wage growth and employment gains could sustain private consumption, which expanded 0.8% quarter-on-quarter in Q2 2025 according to CaixaBank research. Yet, the moderation in consumption growth observed in Q3-2.8% year-on-year-hints at potential fragility according to CaixaBank research.

Sectoral Resilience: Construction and Manufacturing Lead the Way

Construction is a standout performer, driven by falling interest rates, NGEU (Next Generation EU) funding, and a housing deficit according to CaixaBank analysis. The sector is projected to grow 3.3% in 2025, though supply constraints like land shortages could limit output according to CaixaBank analysis. For equities, construction firms with exposure to renewable energy infrastructure-such as solar and wind projects-are particularly attractive, given Spain's competitive edge in green energy according to CaixaBank analysis.

Manufacturing, meanwhile, is rebounding from energy cost shocks. Lower energy prices relative to European peers have positioned Spain as a manufacturing hub, with growth forecasts of 2.3% in 2025 according to CaixaBank analysis. However, export-oriented industries face headwinds from global trade tensions and a widening trade deficit. By Q1 2025, the non-energy goods deficit had ballooned to €25.1 billion, driven by 7.4% year-on-year import growth according to CaixaBank research. This highlights a key risk: while domestic demand fuels growth, external imbalances could erode equity valuations in export-heavy sectors.

Current Account Pressures: A Narrowing Surplus and Rising Income Deficits

Spain's current account surplus has contracted sharply in Q3 2025. In August, the surplus shrank to €5.1 billion, the smallest since April 2025, as the goods and services surplus narrowed to €6.7 billion according to Trading Economics. Meanwhile, the deficit in primary and secondary income-largely driven by foreign direct investment and remittances-remains stubbornly high according to Trading Economics. This trend reflects Spain's reliance on capital inflows to fund trade deficits, a dynamic that could become unsustainable if global liquidity tightens.

For equities, the current account contraction signals vulnerability in sectors reliant on foreign capital. Utilities, for instance, benefit from Spain's low energy costs but face indirect risks from global trade tensions according to CaixaBank analysis. Conversely, consumer goods firms may see muted growth as households prioritize essentials amid inflation, though e-commerce adoption offers a partial offset according to CaixaBank analysis.

Investment Opportunities: Balancing Resilience and Risk

The IBEX 35's performance in 2025 highlights the importance of sectoral diversification. While the index has benefited from AI-driven digital services and offshore expansion according to Seeking Alpha, construction and manufacturing remain critical for long-term growth. Investors should prioritize firms with exposure to NGEU-funded projects and those leveraging Spain's energy transition.

However, caution is warranted. The trade deficit and current account pressures suggest that external shocks-such as a global slowdown or tighter monetary policy-could disproportionately affect export-oriented sectors. Defensive plays in utilities and consumer staples may offer stability, but their growth potential is capped by inflation and shifting consumer behavior according to CaixaBank analysis.

Conclusion

Spain's economy is a study in contrasts: resilient domestic demand coexists with fragile external balances. For investors, the path forward lies in sectors that align with structural trends-construction, manufacturing, and renewables-while hedging against current account risks. As the IBEX 35's trajectory shows, innovation and digital transformation will be key to unlocking value in this mixed economic environment according to Seeking Alpha.