Bank of Spain Cuts GDP Forecast as US Tariffs Cloud Outlook

The Bank of Spain has lowered its 2025 GDP growth forecast to 2.4% from 2.7%, citing economic uncertainty stemming from U.S. trade policies, particularly those of former President Trump. Despite the lowered outlook, Spanish output is still projected to outpace the Euro-area average, driven by tourism, IT, and lower energy prices; inflation is expected to be 2.4% in 2025, down from the prior 2.5% forecast, with further slowing to 1.7% the following year.

Analysis

The Bank of Spain has revised its 2025 GDP growth forecast for the country downwards to 2.4% from a previous estimate of 2.7%, primarily attributing this adjustment to significant economic uncertainty stemming from U.S. trade policies. This cautious outlook extends to 2026, with the GDP forecast also trimmed to 1.8% from 1.9%. Despite these revisions, Spanish economic output is still anticipated to expand at a faster pace than the euro-area average, buoyed by robust sectors such as tourism, consulting, and IT, alongside benefits from lower energy prices and a positive impact from migration. On the inflation front, the central bank projects a rate of 2.4% for 2025, a slight decrease from the 2.5% forecasted in March, with expectations for a further slowdown to 1.7% in the subsequent year, positioning it below the European Central Bank's 2% target. This economic reassessment occurs in a context where the ECB recently cut interest rates, and Bank of Spain Governor Jose Luis Escriva highlighted that assumptions guiding monetary policy might require adjustments due to uncertainties, partly linked to potential U.S. tariff implementations, with a notable 90-day pause on higher EU tariffs by the U.S. set to expire on July 9. The governor underscored the "extraordinary uncertainty," warning of a potential deterioration in the economic scenario in the coming months.

Key Decisions for Investors

• Investors should closely monitor developments in U.S.-EU trade relations, particularly around the July 9 U.S. tariff deadline, as this is a key source of downside risk for the Spanish economic outlook.
• Consider the relative strength of the Spanish economy within the Eurozone, driven by domestic factors like tourism and IT, but weigh this against the significant external uncertainties, primarily U.S. trade policy, that could temper growth.
• The declining inflation trajectory, projected to fall below the ECB's target, alongside recent ECB rate cuts, may warrant a review of positions sensitive to Spanish interest rate expectations and sovereign risk.