Spain's Resilient Growth: A Beacon of Opportunity in a Stagnant Eurozone

Spain's economy has defied the Eurozone's recent stagnation, posting a GDP growth rate of 0.6% in Q1 2025 amid a broader slowdown. While the Eurozone expanded by just 0.4%—its weakest pace since late 2023—Spain's performance reflects a unique combination of sectoral resilience, robust domestic demand, and immigration-driven consumption. For investors, this divergence underscores the case for overweighting Spanish equities or ETFs, which offer exposure to a market outperforming its European peers.

Sectoral Strengths Anchor Resilience

Spain's economy is being propelled by its industrial and services sectors, even as construction and primary sectors face headwinds.

• Industry: Industrial output surged 1.1% quarter-on-quarter, driven by machinery and manufacturing. This sector's momentum, fueled by EU-funded infrastructure projects and rising demand for renewable energy equipment, contrasts sharply with the Eurozone's broader stagnation.
• Services: While services growth moderated to 0.3% QoQ from 0.9% in late 2024, the sector remains a pillar of demand. Tourism, a critical component of Spain's services sector, has held up despite rising global interest rates. The Balearic and Canary Islands, tourism hubs, reported no significant declines, a testament to Spain's global appeal.

The construction sector, however, slowed to 0.4% QoQ—its weakest pace since late 2022—as regulatory reforms and higher borrowing costs dampened activity. Meanwhile, the primary sector (agriculture and energy) surged 7.1% QoQ, likely reflecting energy production gains from renewable projects.

Domestic Demand: A Foundation of Strength

Spain's domestic demand contributed 0.4 percentage points to Q1 growth, despite cooling from prior quarters. This moderation masks deeper resilience:

• Labor Market: Unemployment hit a record low of 6.2% in March, with full-time equivalent jobs up 2.9% year-on-year. Strong employment growth has bolstered household consumption, which rose 0.4% QoQ.
• Immigration-Driven Consumption: Spain's population has grown by 0.7% annually since 2021, fueled by immigration from Latin America and North Africa. These new residents, many of whom are working-age, are driving demand for housing, retail, and services.
• Fiscal Support: EU recovery funds and Spain's own spending on housing and green infrastructure are set to boost growth. The government's €30 billion plan for affordable housing and its expansion of EV charging networks will further underpin domestic demand.

Why Spain Outperforms the Eurozone

While the Eurozone faces headwinds—geopolitical risks, trade tensions, and high energy costs—Spain's economy is shielded by its structural advantages:

1. Tourism and Services Exports: Spain's tourism sector, which accounts for 12% of GDP, benefits from its geographic diversity and visa-free access for key markets like China.
2. Industrial Diversification: Unlike Germany's reliance on automotive exports, Spain's industrial base includes machinery, pharmaceuticals, and renewable energy components—sectors less exposed to U.S. trade tariffs.
3. Fiscal Flexibility: Spain's public finances have stabilized, with a deficit of just 2.2% of GDP in 2024, allowing it to deploy fiscal stimulus without triggering market concerns.

Risks on the Horizon

No economy is without risks. Spain's growth could be dented by:
- A prolonged U.S.-EU trade dispute, which could disrupt automotive and machinery exports.
- A power blackout in April 2025, costing an estimated €1.6 billion, may weigh on Q2 growth.
- Rising interest rates, though the ECB's cautious stance—having cut rates to 2.75% in April—provides a buffer.

Investment Implications

Despite these risks, Spain's outperformance relative to its peers and its structural tailwinds make it a compelling investment case. Investors should consider:

• Spanish Equity ETFs: The iShares MSCI Spain ETF (EWP) offers broad exposure to Spain's resilient sectors, including banks (Sabadell, BBVA), construction firms (FCC Construcción), and utilities (Iberdrola).
• Sector-Specific Plays:
• Industrial machinery: Acciona, a leader in renewable energy infrastructure.
• Tourism-related stocks: Meliá Hotels International, benefiting from strong global travel demand.

Conclusion

Spain's economy is a rare bright spot in a slowing Eurozone. Its industrial diversification, immigration-driven demand, and prudent fiscal policies create a foundation for sustained growth. While risks linger, the case for Spanish equities—particularly in industrials and services—remains strong. Investors seeking exposure to Europe's growth leader should prioritize Spain now.