Spain and Portugal pull ahead on the strength of domestic demand, industrial resilience, and pragmatic reforms as much of the bloc struggles to find its footing

By early February, the eurozone’s economic narrative is marked by caution. High borrowing costs, fragile confidence, and uneven industrial performance continue to weigh on growth across much of the bloc. Yet on the western edge of the continent, Spain and Portugal are telling a different story—one of momentum, resilience, and a renewed sense of economic confidence that sets them apart from many of their peers.

While the broader eurozone grapples with tepid expansion and persistent uncertainty, the Iberian economies are outpacing the average, buoyed by robust domestic demand, diversified industry, and policy choices that have translated into tangible activity on the ground. Their performance is not a sudden surge, but the result of structural shifts that have been quietly reshaping both countries over recent years.

Domestic demand as the main engine

At the heart of the Iberian outperformance lies a powerful driver: domestic demand. In Spain, household consumption has remained resilient despite higher interest rates and a more cautious European consumer. Employment gains, wage adjustments in key sectors, and targeted social measures have helped sustain spending, particularly in services and retail.

Portugal shows a similar pattern. Consumers have continued to support growth through steady spending, while businesses—especially small and medium-sized enterprises—have maintained investment plans. Public investment linked to infrastructure, energy transition projects, and urban renewal has reinforced this momentum, providing a counterweight to weaker external demand.

Economists note that this reliance on internal demand marks a contrast with earlier cycles, when both economies were more exposed to external shocks. Today, a broader tax base, healthier banking sectors, and improved fiscal credibility have given governments greater room to act without unsettling markets.

Industry regains relevance

Industrial performance has also played a decisive role. Spain’s manufacturing sector, long overshadowed by tourism, has benefited from renewed investment in automotive components, pharmaceuticals, and agri-food processing. The gradual reconfiguration of European supply chains has favored Spanish producers, particularly those integrated into regional value networks.

Portugal, meanwhile, has leveraged its strengths in specialized manufacturing, including machinery, textiles with higher value-added, and export-oriented niches tied to technology and engineering. While global demand remains uneven, Portuguese industry has shown an ability to adapt quickly, shifting production and markets with notable flexibility.

Energy has emerged as another pillar. Both countries have capitalized on abundant renewable resources, not only to lower energy costs domestically but also to position themselves as attractive destinations for energy-intensive industries seeking stability and sustainability.

Tourism, but not only tourism

Tourism remains an important contributor, especially in Spain, where visitor flows continue to support services, transport, and hospitality. Portugal has also benefited from sustained interest in its cities and coastal regions. Yet what distinguishes the current phase is that growth is no longer overly dependent on tourism alone.

Authorities in both capitals have emphasized diversification, encouraging technology, green investment, and knowledge-based services. This strategy has begun to bear fruit, with start-up ecosystems expanding and foreign firms establishing regional hubs in cities such as Madrid, Barcelona, Lisbon, and Porto.

A contrast with eurozone headwinds

The Iberian performance stands out against a eurozone backdrop characterized by subdued industrial output and cautious investment. Several large economies continue to face structural constraints, from demographic pressures to slower productivity gains. Financial conditions remain tight, dampening credit growth and business confidence.

Spain and Portugal are not immune to these challenges, but analysts argue that their relative dynamism reflects a more favorable balance between reform and stability. Labor market adjustments, streamlined business regulations, and clearer investment frameworks have improved predictability—an asset in uncertain times.

Fiscal credibility has also mattered. Both governments have signaled commitment to prudent budget management while preserving targeted support for households and firms. This approach has helped contain risk premiums and sustain investor confidence, even as other parts of the eurozone struggle to reconcile growth and discipline.

Risks on the horizon

Despite the positive momentum, risks remain. External demand could weaken further, particularly if global trade tensions intensify or if key partners slow more sharply. Inflation, though more contained than before, still poses challenges for purchasing power and policy coordination.

Housing affordability and regional disparities are also emerging as sensitive issues, especially in urban centers benefiting most from growth. Policymakers face the task of ensuring that expansion remains inclusive and sustainable, avoiding bottlenecks that could undermine public support.

A signal for Europe

The experience of Spain and Portugal offers a broader lesson for the eurozone. Growth, even in a constrained monetary environment, is possible when domestic demand is nurtured, industry is modernized, and policy signals remain consistent. Their trajectory does not suggest immunity from shocks, but it does highlight the value of long-term adjustments made before the current slowdown took hold.

As Europe searches for renewed dynamism, the Iberian example underscores that convergence is not merely a matter of fiscal targets or monetary alignment. It also depends on how effectively economies translate reforms into everyday activity—jobs created, factories running, and consumers confident enough to spend.

For now, Spain and Portugal are doing just that, carving out a pocket of growth on the Atlantic edge of the eurozone, and reminding the continent that momentum can still be built, even in challenging times.