Spain’s services sector shows ongoing improvement, although demand conditions have softened, with a drop in new work for the first time in 18 months. This improvement is primarily driven by existing contracts, and the outlook remains optimistic.

The private sector grew at a slightly faster pace in June, aided by manufacturing and services, according to HCOB PMI figures. However, activity growth remains below earlier peaks this year, with political uncertainty posing a potential obstacle.

Despite political tensions, service firms report a small improvement in their future outlook. They believe the current political situation won’t majorly affect economic fundamentals or consumer demand.

Demand conditions appear to weaken as order books for new business fall for the first time in 18 months. Nevertheless, a cautiously optimistic outlook has led firms to expand their workforce, albeit more slowly. A decline in outstanding business hints at looser labour market conditions.

Operating costs stay high, with persistent wage pressures across the sector. Some firms experienced higher transportation costs, expected to ease if the Middle East ceasefire holds. In response, prices by service providers rose in June, marking the year’s fastest inflation pace.

What we’re seeing here is a service economy in Spain that continues to move forward, although not without showing clear signs of strain. There’s a growing divide between what firms are delivering now and what’s coming through the pipeline. Existing contracts are doing much of the heavy lifting, which tells us clients are still committed to prior agreements, but hesitation is building when it comes to placing new orders. That bit—the first fall in new work in a year and a half—is not just a blip. It’s a useful gauge for near-term sentiment, and right now, that gauge is blinking amber.

Interestingly, recent data from the composite PMI reveals modest growth across the private sector, nudged upward by both manufacturing and services. That in itself isn’t surprising. What’s important is that the current pace is softer than earlier highs, underscoring how rapidly momentum can flatten without much warning. The presence of political uncertainty only sharpens that possibility. The narrative here, according to the data, is not that growth has stalled—but that it’s far more vulnerable than it was just a few months ago.

That said, the sense among service firms is surprisingly upbeat. Most of them see past the current noise and maintain confidence in the long-term view. It’s not necessarily that they’re wrong; rather, they may be putting faith in consumer resilience and in a wider assumption that economic fundamentals will avoid a heavy knock. However, when new orders fade, hiring naturally follows suit—and that’s exactly what’s happening now. Labour expansion continues, but at a more measured pace. Firms are layering in staff only where justified, not pre-emptively. That’s not unusual after a long growth streak, but it sharpens our focus on how quickly sentiment can shift once demand falters.

One other marker worth noting is the decrease in backlogs. That can often be interpreted in two ways. On one hand, it reflects a clearing out of older work—progress, in essence. On the other, it suggests capacity isn’t being stretched anymore. When firms finish work faster than they replace it, it’s nearly always a sign supply is outpacing demand. That could loosen employment conditions further if not reversed quickly.

Costs remain uncomfortable. That’s not an overstatement. Wage pressures continue to bite, and although higher costs of transport were flagged by some, there’s expectation they’ll reduce if geopolitical tensions ease in the Middle East. But in the meantime, firms have passed these pressures on through price rises, making June the fastest inflation month in the sector so far this year. That doesn’t just affect margins—it quietly shifts the boundary for customer affordability and future pricing strategy. It’s another metric to watch closely.

For those of us eyeing short-term market positioning, it’s not just the headline growth that matters most now—it’s the direction of future new business and the price trends that emerge from this environment. The numbers don’t lie: forward momentum is slowing. Whether or not it turns into a broader contraction depends largely on incoming demand and whether this cautious optimism holds its ground.