Spain service sector growth accelerates in September

Spain's service sector expanded at an accelerated pace in September, with the HCOB Services PMI rising to 54.3, driven by the strongest new business growth since early in the year, contributing to a stable Composite PMI of 53.8. While business confidence improved and employment continued to grow, albeit at a slower pace, persistent capacity constraints and elevated input costs led to continued, though moderating, selling price increases. The primary concern remains the marginal growth in new export business, particularly in tourism, which could be impacted by external political uncertainties.

Analysis

Spain's service sector demonstrated accelerated expansion in September, with the HCOB Services PMI rising to 54.3 from 53.2 in August, signaling robust underlying health. This growth was primarily propelled by the strongest increase in new business since the beginning of the year, indicative of strong domestic demand conditions. Consequently, business confidence surged to a six-month high, with firms planning to expand their service offerings. However, a clear divergence exists with external demand, as new export business grew only marginally amid reports of soft tourism. On the operational front, while employment growth continued for the 36th consecutive month, the pace of hiring was the softest since November 2023. This slowdown, coupled with a third consecutive monthly rise in backlogs of work, points to persistent capacity constraints. Inflationary pressures remain a key theme; a sharp rise in operating costs, driven by higher salaries, kept input cost inflation at historically elevated levels. While firms passed on these costs, extending a four-and-a-half-year streak of price hikes, the rate of increase moderated to the weakest in four months, potentially signaling a slight easing in pricing power. The strength in services was sufficient to keep the broader private sector economy on a solid growth path, with the Composite PMI at 53.8, offsetting softer manufacturing performance.

Key Decisions for Investors

• The robust domestic demand and high business confidence support a constructive view on Spanish equities with a primary focus on the internal market, particularly within the consumer and business services sectors.
• Investors should exercise caution with companies heavily reliant on Spanish tourism and exports, as the marginal growth in foreign new business represents a significant headwind that could suppress revenue growth in these segments.
• The combination of slowing employment growth, rising work backlogs, and persistent wage-driven cost inflation warrants close monitoring of corporate margins, as firms with limited pricing power may face profitability pressures.
• Sticky service sector inflation, though showing signs of moderating price hikes, could contribute to a continued restrictive monetary policy stance from the European Central Bank, potentially limiting upside for rate-sensitive assets.