Bank of Spain Raises 2026 Growth Forecast to 2.3% Amid Iran War Shock

The Bank of Spain raised its 2026 GDP growth forecast by one tenth to 2.3% on Friday, even as the ongoing war in Iran shaved 0.4 percentage points off the country's economic trajectory, according to the institution's first-quarter macroeconomic projections published March 27, 2026. The upward revision was only possible because strong economic momentum in late 2025 and early 2026 had been pushing growth toward 2.4%, and because the Spanish government's crisis response plan added 0.3 percentage points to offset part of the war's drag. Without either factor, the conflict alone would have pulled growth down to 2.0%. The 2027 forecast was revised downward by two tenths to 1.7%, reflecting deterioration in the external environment and the expected reversal of the fiscal stimulus. Inflation projections worsened sharply, with the average headline rate for 2026 now seen at 3.0%, up nine tenths from the 2.1% projected in December 2025.

Spain's economy outperformed most of its European peers in 2025, with the Bank of Spain estimating full-year growth of 2.9%, up from a prior forecast of 2.6%. In December 2025, the institution had projected 2.2% growth for 2026. The current revision cycle was triggered by the outbreak of the US-Israel war on Iran, which began on February 28, 2026, and which the Bank of Spain identified as a negative supply shock through higher oil and gas prices. The institution noted that economic activity in both the final quarter of 2025 and the opening months of 2026 had exceeded expectations before the conflict altered conditions in March.

David López Salido, director of economics at the Bank of Spain, said the Spanish economy had shown high dynamism and resilience in January and February before the war shock altered that dynamic. „The Spanish economy showed high dynamism, resilience and robustness in January and February, but the war shock has altered that dynamic.” — David López Salido via El Periódico López Salido gave a broadly positive assessment of the government's emergency measures, noting they were approved quickly and with a limited duration, but he criticized their design for not being sufficiently targeted at the most vulnerable groups. The Bank of Spain's report echoed that critique, calling for measures more focused on households and businesses with the least capacity to absorb the energy price shock. The institution led by Governor José Luis Escrivá noted that the government's plan would reduce final electricity prices and other supply costs, moderating inflation both directly through the energy component and indirectly by easing production costs and containing second-round price pressures. The measures are set to remain in place until June 30, with a deactivation clause if conditions improve before that date.

Severe conflict scenario could push inflation near 6% The Bank of Spain laid out two alternative scenarios beyond its baseline, with outcomes ranging from manageable to severe depending on how the Iran conflict evolves. In the adverse scenario, which assumes a transitory increase in crude oil and electricity prices, GDP growth would slow to 2.2% in 2026 and 1.5% in 2027, while inflation would reach 3.9% in 2026 and 2.0% in 2027. The severe scenario, which assumes a more intense and longer-lasting armed conflict, would push 2026 growth down to 1.9% and 2027 growth to 1.1%, while the general inflation rate would spike to 5.9% in 2026 and 3.2% in 2027. The institution described the degree of uncertainty surrounding its projections as "especially high" given the unpredictable trajectory of the Middle East conflict. Core inflation, which strips out energy and food, is projected at 2.7% for 2026 in the baseline scenario, two tenths above the December estimate. For 2027, headline inflation is seen at 2.5% in the baseline, revised upward by six tenths, driven by energy raw material prices, the elimination of public transport subsidies, and base effects from higher energy taxation.

War impact and stimulus package pull growth in opposite directions The Bank of Spain's projections document made explicit the arithmetic behind the 2026 forecast, breaking down the competing forces acting on the Spanish economy in a way that illustrated the fragility of the current growth path. Strong activity in the fourth quarter of 2025 and the first two months of 2026 contributed two tenths of a percentage point to the upward revision from December's 2.2% baseline. The Iran war then subtracted 0.4 percentage points, while the government's Middle East crisis response plan added back 0.3 percentage points, yielding the net 2.3% figure. The Bank of Spain described the plan's macroeconomic effect as "positive in the short term," crediting it with cushioning fluctuations in inflation linked to the sudden rise in energy prices. The institution also warned that once the energy tax cuts in the government plan are reversed in the second half of 2026, the pace of price growth could reach around 3.3% by year-end. For 2027, the reversal of the fiscal stimulus is itself listed as one of the factors pulling growth below the pre-war trajectory, compounding the drag from a deteriorated external environment.

Baseline: 2.3, Adverse scenario: 2.2, Severe scenario: 1.9, Pre-war trajectory: 2.4