Spain’s economy keeps growing — why is the country doing so well?

Spain's booming economy is outpacing its European neighbors as tourism, foreign investment and immigration helps fuel growth.

The southern European country is still leading growth in the euro zone with annual gross domestic product forecasted to rise 2.5% this year, while the economies of France, Germany and Italy are respectively forecast to expand 0.6%, 0% and 0.7%.

Spain's GDP surpassed expectations in the second quarter, growing 0.7%, above a Reuters forecast of 0.6%. The growth was also higher than the previous three months, which levelled at 0.6%, data from the Spanish National Statistics Institute (INE) showed.

"For the second year in a row, we will be the advanced economy number one in terms of GDP growth," Spain's Finance Minister Carlos Cuerpo told CNBC in April.

"Spain is a great outlier now in terms of growth. It's also a great place to invest," he added.

The success of Spain's economy relies on high consumption and investment, as well as tourism, Next Generation European funds, and immigration.

"It's not just tourism, it's also non-tourism services. We're exporting more in terms of services to firms like IT, accountability services, financial services, than we're exporting in terms of tourism — 100 billion euros [$116.8 billion] with respect to 94.95 billion [euros in tourism]. So that's an element of modernization of the Spanish economy," said Cuerpo.

Despite this economic growth, several challenges await Spain, such as keeping pay in line with the rising cost of living, climate change, an ever more divided political scene and the fact the country has the highest youth employment rate in the EU.

"What is going to happen with tariffs and international trade, especially in an economy like Spain, where exports of goods have increased considerably over the last 15 years?" said Cardoso.

"The second challenge is that the savings rates remains relatively high. A third source is this low investment rates. And finally, how to decrease the government deficit and public debt."

Still, tourism in Spain represents around 12% of the country's GDP, as it benefits from the pandemic rebound, and cheaper prices compared to other Western European nations.

The sector's success has sparked backlash from local communities over the influx of people visiting historic and popular sites, particularly during the peak summer months. Last year in June, protesters in Barcelona were seen spraying travellers with water guns and shouting "tourists go home."

The sector can also count on its growing workforce of nearly 3 million people as of 2024, a progression of 9.7% compared to 2023.

Job creation is also supported by high immigration. While other European countries are closing their borders, Spain is planning to welcome nearly a million migrants over the next three years, through work visa schemes and the granting of residence permits to undocumented workers.

"90% of the increase in the labour force since 2021 comes from immigration," BBVA Research's Chief Economist Miguel Cardoso told CNBC.

"This is allowing the service sector to expand. This is keeping firms relatively competitive in terms of containing the increase in labour costs, and it's allowing, for example, the prices in services to remain relatively contained in a high inflationary environment."

Las year, most people migrating to Spain came from Colombia, Venezuela and Morocco.

"Latin American economies, some of them are not doing relatively well, so there is this push factor. There is also the fact that immigration to the United States has become more difficult, and therefore people are turning around and seeing alternatives," added Cardoso.

Spain's economy has also been bolstered by the European Union's Next Generation EU funds which has made 163 billion euros available to Spain, through grants and loans. The country is the second biggest beneficiary of this pandemic recovery assistance, following Italy.

Spain's Cuerpo told CNBC that 70% of the grants — 55 billion euros — have already been dispersed.

"This was a program that was designed in part to try to help with the recovery after the pandemic," said Cardoso.

"So the government prioritized investment projects that they already had a plan for, and therefore they are having a relatively low multiplying effect within the economy."

Nonetheless, the Spanish government aims to use these funds in sectors such as non-tourism services exports, including renewables.

Since investing in green energy in the 2000s, Spain has benefited from low energy costs and has seen less impact from the European energy crisis that followed Russia's invasion of Ukraine in 2022.

"The increase in the renewable share in the electricity mix over the past five, six years has implied a drop of 40% in wholesale electricity prices," Cuerpo said.

Low production costs are an attractive criterion for companies, particularly foreign investors, who also supply the sector.

Photovoltaics tracker company Arctech, founded in China in 2009, opened its European headquarters in Madrid in 2024. Photovoltaic cells convert sunlight directly into electricity. It's a burgeoning renewable energy source that can lead to lower electricity costs.

"Spain is probably the location in Europe where the most PV has been done," Arctech's EU and NA Markets General Manager Pedro Magalhaes told CNBC.

"The solar ecosystem is really here [in Spain], from the junior engineer, all the way to the funds that are investing in these large assets."

The company now boasts 17 branches outside China, and is planning to expand in Eastern Europe, as well as plans to diversify into storage solutions.

"Things are happening here. We use the port of Valencia to import and distribute to many locations in Europe," Magalhaes added.

Like Arctech, many foreign companies are planning to take advantage of the country's low energy costs.

Auto giant Stellantis teamed up with battery manufacturer CATL in late 2024, announcing plans to build a $4.3 billion lithium iron phosphate battery plant in Zaragoza, northeastern Spain.

Foreign direct investment in Spain is strong too, with the country ranking as the fourth most attractive country in the EU for investors. China alone declared it will be investing up to 11 billion euros in Spain in 2025, as it gears up for a record 33 new projects in the country.

"When you look at where does that investment come from, the largest investor in Spain is U.S.," said Cuerpo.

"But we're also attracting investment from other parts of the world, including China, on specific sectors related to renewables, to sustainable mobility as well, and this is of course, always part of our economic security agenda."