Spain: Selected Issues

This Selected Issues paper assesses the sluggish recovery and post-pandemic investment in Spain. The investment recovery has been weak across all components, but particularly so in transport equipment and other construction. Investment has been lagging euro area peers and has also remained below levels implied by its historical drivers, narrowing the gap with these fundamentals only in recent quarters. While Spain’s investment shortfall remains to be fully explained, analysis in this paper finds that elevated economic policy uncertainty has been a drag. Compared to other large euro area economies, firm-level data also point to a weaker investment response to profitability among small firms—which make up a large share of the Spanish economy—and younger to middle-aged firms—which are key drivers of growth. This also hints at a potential role of uncertainty or other factors weighing on Spanish firms’ willingness to invest, even when financial capacity is available. For younger and middle-aged firms specifically, financial constraints, as captured by high leverage, are also found to have been a constraint during the pandemic. Reducing domestic policy uncertainty, improving financing conditions for constrained firms, and addressing structural barriers to investment could help unlock a more sustained and broad-based investment recovery.