Updated: May 13, 2026

Spain’s economy entered the second quarter of 2026 with stronger-than-expected momentum, but rising energy prices tied to the escalating conflict in the Middle East are beginning to cloud the outlook. April’s data shows an economy still driven by domestic demand, even as inflation pressures re-emerge and external risks build.

Spain GDP growth steady for now

Spain’s GDP grew 0.6% quarter-on-quarter in the first quarter of 2026, slightly above expectations and only modestly below the 0.8% recorded in the previous quarter. On an annual basis, growth reached 2.7%, reinforcing the narrative of a resilient economy despite mounting uncertainty.

The key driver remains domestic demand, which contributed 0.4 percentage points to quarterly growth and 3.4 points year-on-year. Household consumption, in particular, showed notable strength, rising 0.6% over the quarter. This is significant given the backdrop of adverse weather disruptions and a sharp rise in fuel prices in February and March.

Labor market softened in Q1

Spain’s labor market softened at the start of the year, with the unemployment rate rising to 10.83% in Q1 2026, up from 9.9% in the previous quarter, as seasonal job losses after the holiday period pushed 231,500 more people into unemployment. Despite the quarterly increase, the broader trend remains constructive: employment is still near record highs and the jobless rate marks the lowest first-quarter level since 2008, underscoring underlying resilience even as hiring shows early signs of cooling.

Business investment slows to a cautious pace

Gross fixed capital formation—the net investment in assets like machinery, buildings, and software—has begun to cool. After several strong quarters, it grew just 0.1% in Q1, with construction stagnating and transport equipment declining. While still robust on an annual basis at 5.8%, the quarterly slowdown to near-zero suggests businesses are becoming more cautious.

Trade growth is weakening

External demand offered a rare positive contribution to quarterly growth, adding 0.2 points. However, this was largely due to a sharper fall in imports than exports, signaling underlying weakness in trade. Goods exports declined, reflecting rising global protectionism and early impacts of the Iran conflict, while services, particularly non-tourism, remained a bright spot.

More European Central Bank interest rate hikes expected

Monetary policy, meanwhile, is expected to tighten. Markets are currently pricing in up to three interest rate hikes from the European Central Bank in 2026, potentially lifting the deposit rate to around 2.75% by year-end. While the immediate impact on growth is limited, tighter financial conditions could weigh more heavily in 2027.

That said, CaixaBank Research's latest report suggests that if inflation remains sticky near 3%, the European Central Bank may be forced to maintain current levels to anchor expectations, rather than continuing a cutting cycle.

Overall, the Q1 data suggests Spain’s full-year economic growth forecast would likely fall short of the 2.4% but should remain slightly above 2.0%, according to CaixaBank Research’s estimates. But that optimism is fragile. Much of the energy shock has yet to fully filter through the economy, and risks for the coming quarters remain.

Inflation eases slightly but energy pressures persist

Inflation in Spain showed a modest slowdown in April, but underlying pressures tied to energy markets remain firmly in place. According to the flash estimate from INE, headline inflation eased to 3.2% year-on-year, down from 3.4% in March, while core inflation (excludes food and energy) edged lower to 2.8%. CaixaBank Research notes the decline was largely driven by falling electricity prices, helped by strong renewable generation and government measures, even as fuel costs continued to rise.

Energy remains the key inflation driver. Despite some easing, the energy component still rose 6.3% year-on-year in April, with diesel prices up 28.5% compared with a year earlier. Monthly movements highlight the divergence: electricity prices dropped sharply, with regulated tariffs falling over 11%, while fuel prices continued to climb, reflecting sustained pressure from higher oil costs linked to the Middle East conflict.

Beyond energy, inflation remains relatively contained. Services inflation moderated to 3.4%, partly due to Easter calendar effects. Food inflation remained stable at 3.0%, with a slight easing in fresh food offset by gradual increases in processed items. This pattern suggests that the effects from energy price volatility into broader prices are still limited for now.

Looking ahead, the outlook points to persistent inflation above 3% in 2026. With oil prices hovering near $90 per barrel and gas prices elevated, and even accounting for government support measures such as VAT cuts on energy, CaixaBank Research estimates average inflation could settle at 3% this year, up from their previous 2.4% forecast.

The Iran conflict contributes to economic uncertainty

The conflict involving Iran is emerging as the central macroeconomic risk for Spain in 2026, primarily on energy. Higher oil and gas prices are already feeding directly into inflation. CaixaBank Research estimates suggest that a 10% increase in oil prices adds around 0.2 percentage points to headline inflation, while gas price increases have a smaller but still meaningful effect.

Under current market conditions, with oil hovering near $90 per barrel and gas prices elevated, the total impact could add up to 1 percentage point to Spain’s inflation this year. That would push average inflation above 3% in 2026, compared with earlier forecasts closer to 2.4%.

The indirect effects are likely to emerge more slowly. As energy costs feed into production, businesses may pass higher input costs onto consumers over the coming months. Historically, this process takes around nine months to become fully visible, meaning the inflationary impact could intensify into late 2026.

On the growth side, Spain’s direct exposure to the Middle East is limited, with the region accounting for roughly 2% of exports. Even under a severe scenario, the drag on GDP from reduced trade would likely be modest—around 0.15 percentage points.

The greater risk lies in broader global spillovers. A slowdown in Spain’s main trading partners, particularly in the eurozone, could weigh more heavily on growth. So far, these effects appear contained.

Economic outlook remains solid

Spain’s economy remains on solid footing, supported by strong consumption and a resilient labor market. But the balance is becoming more delicate.

If energy prices stabilize and the geopolitical situation improves, the impact on growth could remain limited, shaving only a few tenths off GDP. In that scenario, Spain could still achieve growth close to current forecasts.

However, a prolonged conflict with sustained energy disruptions would present a more challenging outlook. Growth could slow more sharply, inflation could remain elevated, and policy trade-offs would intensify. As is much the theme of 2026, the world economy will be dependent on whether or not Middle East tensions can ease.

Article has been updated to reflect slight changes to Caixabank Research's latest GDP and inflation forecasts.