Spain’s services economy continued to expand in January, supported by activity fuelled by the largest increase in new business volumes since April 2023. Employment levels were lifted in response to continued pressure on capacity levels, with the latest increase in employment the best in just over 24 years. Confidence in the outlook also improved.
However, as firms reported a rise in typical wage expenditure, input cost inflation accelerated to its highest level in nearly a year. Output prices were lifted in response to a notable degree.
The survey’s headline indicator, the HCOB Spain Services PMI®, remained comfortably above the crucial 50.0 unchanged mark in January to indicate a 17th consecutive monthly increase in service sector output. However, the decline in the index, from 57.3 in December to 54.9 in January, pointed to a slower pace of expansion.
Activity continued to be supported by higher new business volumes. The rate of growth in new business in January was rapid, rising to its highest level since April 2023. Respondents noted that demand for their services was strong, and that trading activity helped support new business gains. However, the latest data suggests that growth was focused on domestic markets. Although new export business rose again in January, the rate of growth was marginal and significantly weaker than at the end of last year.
The sharp rise in new business put pressure on service providers in January, as evidenced by a further increase in outstanding work. January marked the 13th consecutive month that arrears have risen, and growth was again notable, albeit slower than the December high.
Typical labour expenditure rises in January
In response to the rise in overall workloads, service providers chose to hire additional staff at a rapid and accelerated pace. The January survey indicated that employment rose to the highest level since December 2000. Firms hired workers in response to the sustained growth in new business, and as part of business expansion plans. Participants also noted a rise in typical labor costs in January, seeing it as a major factor in pushing overall operating costs higher since December. Inflation also picked up, rising to its highest level since February 2024. Suppliers also increased their prices, and utility costs rose in some cases.
In line with a trend that now spans almost four years, companies increased their output charges in response to higher operating expenses.
Although inflation was weaker than in December, it was still comfortably above trend. Looking ahead to the next 12 months, service providers maintained a high level of confidence that activity will increase from current levels. Sentiment was at its highest since February 2022, with companies anticipating a rebound in economic growth. Panelists are also planning new business and service launches for the coming year. Commenting on the PMI data, Jonas Veldhuizen, associate economist at Commerzbank Hamburg, said: “Q4 GDP figures surprised again with an uptick, driven by a strong labour market that boosted private consumption. Investment also gained momentum, probably due to the effects of the ECB’s monetary easing. However, the latest HCOB composite PMI for the Spanish private economy suggests that growth has slowed somewhat at the start of the year, with improvements in both manufacturing and services slowing.
The solid figures point to strong employment growth across the Spanish economy
Business activity in the services sector slowed at the start of the year, but activity remains comfortable after the uptick seen in December. “Domestic orders have accelerated, in line with strong domestic demand, while demand from abroad has weakened markedly, likely reflecting weakness in core European countries. “The labour market situation in Spain’s services sector has been particularly favorable.
The firm figures point to strong employment growth across the Spanish economy. The corresponding HCOB employment index rose sharply in January, underscoring the need for companies to increase staff levels to keep up with demand. In line with this, companies expressed greater confidence in the future, building on an already high level. “Concerns remain when analyzing developments in service prices.
Participants in the discussion reported an acceleration in input cost inflation. There are two issues that follow this recent trend. First, from early 2024 to autumn 2024, service input cost inflation remained high, but the pace lost momentum. Over the past two months, input price inflation has accelerated again.
Although this acceleration remains far from the levels seen in 2022 after the pandemic, the January input price index exceeds the levels of 2009-20. This is a concern. Prices that are subject to inflation also remain high in the context of the survey’s history.
Spanish private sector growth slowed in January, reflecting a marked slowdown in manufacturing expansion and weaker gains in service sector activity. However, overall growth remained comfortably above trend. Despite the slowdown in new manufacturing orders, an acceleration in the overall private sector’s new business growth rate supported the services economy, reaching its highest level since November 2021. Capacity remained under pressure, with backlogs of work rising strongly despite the biggest increase in employment since January 2007.