The Banco de España has issued a warning regarding the urgency to accelerate the use of European recovery funds, emphasizing the considerable uncertainty surrounding their overall magnitude and allocation.

In its economic forecasts report released on Tuesday, the bank acknowledged that the volume of fund execution in Spain during 2024 has been slightly below expectations.

The report indicates that to fully utilize the available grants before the program concludes in August 2026, a significant speeding up of fund deployment will be required throughout 2025 and 2026.

As of the end of 2024, Spain had spent approximately €32 billion of nearly €80 billion in non-repayable grants awarded by the European Union, representing around 40% of the total funds.

This figure is notably lower than the EU average, where about 45% has been executed.

In 2024 alone, Spain utilized about €12 billion of these funds.

Additionally, there remains a further €80 billion available in soft loans that must be allocated before the upcoming August deadline.

Once a front-runner in fund disbursement, Spain has now fallen behind, necessitating the renegotiation of milestones and targets for the fifth time to facilitate further disbursements.

Overall, when considering the total funds, including loans, Spain has executed nearly 20% compared to rates exceeding 70% in nations such as Denmark, France, and the Netherlands, which also have considerably smaller amounts to deploy.

In the current context, Ángel Gavilán, the director of the economy at the Banco de España, pointed out that there is a pressing need to accelerate the utilization of these funds.

The institution is projecting an improvement in investment, an area that had lagged since the pandemic, attributing this to enhanced fund deployment, lower interest rates, and increased housing construction.

The central bank also anticipates a slight impact on Spain’s GDP from the national defense spending plan, although uncertainties regarding its scale and composition remain.

The plan is estimated to account for 0.6% of GDP when including loans, but the actual expenditure is considered to be around 0.2% of GDP, which, with a historical multiplier of approximately 0.5, contributes around a tenth of a percentage point to growth this year.

This multiplier may approach 1 if these resources are directed towards domestic investment goods.

The Banco de España has downgraded its GDP growth forecast for 2024, reducing it from 2.7% to 2.4%.

This revision marks a slowdown compared to the 3.2% growth recorded in 2023. The downward adjustment is attributed to data from the first quarter, alongside recent updates from the National Statistics Institute indicating a slight deceleration in activity, particularly in light of increasing trade tensions.

Other influences include escalating commercial conflicts and anticipated adverse effects on external markets, consumption, and investment, as described in the latest confidence surveys.

Despite the downward revisions, the bank has raised its growth estimate by a tenth due to defense spending.

Improvements in energy prices and more favorable financial conditions, compared to three months ago, are also contributing factors.

However, risks remain skewed to the downside, particularly concerning trade with the United States, where around 30% of companies surveyed indicated potential impacts from trade conflicts, primarily on an indirect basis.

Under the central scenario, tariffs are projected to remain at 10% without retaliation, while conflicts with China may intensify.

In a risk scenario, increased tariffs up to 20% for the EU would occur alongside retaliatory measures, exacerbating existing vulnerabilities and potentially reducing Spanish economic growth by a further four tenths in 2024, leading to a growth prediction of only 2%.

In 2025, this could contribute to a decrease in growth by an additional seven tenths, resulting in an anticipated rate of 1.1%.

For the second quarter, the institution forecasts GDP growth between 0.5% and 0.6%, suggesting a gradual slow down from recent performance trends.

The central bank predicts stabilization in tourism after substantial post-COVID growth, while recognizing that consumer behavior remains skewed towards vacation spending.

A slight decline in service exports is expected due to their correlation with goods exports in a climate of trade tensions, leading to diminished contributions from the external sector.

Private consumption is projected to rise alongside improvements in income and employment, while public spending is anticipated to ease after substantial increases in recent years.

On employment, the market is expected to continue generating jobs, albeit at a reduced pace, resulting in a more gradual decline in the unemployment rate from 11.3% in 2024 to 9.7% by 2027.

Inflation is projected to see a modest uptick in the coming months, largely due to the termination of transportation subsidies in July, contributing approximately two tenths to the annual inflation rate.

Following this period, inflation is forecast to moderate to around 2% due to favorable energy prices and the appreciating euro.

The harmonized Consumer Price Index (CPI) is expected to rise by an average of 2.4% in 2025 compared to 2.9% in the previous year, with predictions of 1.7% for 2026. It is foreseen that service prices, particularly within the tourism sector, will increase significantly this summer before tapering off.

The net expenditure on income measures, which the European Commission is currently monitoring for fiscal plans, was less than anticipated in 2024, providing some flexibility for deviations in subsequent years.

However, officials anticipate a 4.8% increase in this indicator for 2024, compared to the previously committed 3.7%, which may prompt compliance concerns.

The Banco de España indicated that an escape clause could be invoked due to increased defense spending, but acknowledged substantial uncertainty surrounding these figures.