After it became the capital of Spain in the 16th century, Madrid was more a centre of consumption than of production or trade. Economic activity was largely devoted to supplying the city's own rapidly growing population, including the royal household and national government, such trades as banking and publishing.

A large industrial sector did not develop until the 20th century, but thereafter industry greatly expanded and diversified, making Madrid the second industrial city in Spain. However, the economy of the city is now becoming more and more dominated by the service sector.

Economic history

16th to 18th centuries

Seat of government After Philip II made Madrid the capital city of the Spanish Empire in 1561, the city experienced rapid growth. As Spain (like many other European countries) continued to centralize royal authority, particularly under the Bourbon monarchs, Madrid took on greater importance as a center of administration for Spain. It was sometimes described as an "economic parasite", sucking in the resources of the empire without directly generating wealth.

Manufacturing During this period Madrid became an important nucleus of artisanal activity. Some proto-capitalist institutions were established, including the "Five Great Guilds" (Cinco Gremios Mayores) or the Banco de San Carlos, as well as producers to the royal household such as the Porcelana del Buen Retiro (porcelain) and the Fábrica de Tabacos (tobacco). The supply of goods to the city was a major concern of the national and municipal governments, and was accomplished through a complex network of agents and public and private institutions, functioning along mercantilist lines and centred upon the Plaza Mayor and a number of other marketplaces.

During the transition to capitalism, Madrid, unlike other cities such as London and Paris, did not become a great centre of trade. It was not a suitable location for trade at that time, due to its geographical position, far from the sea or navigable rivers. Thus Madrid remained largely a political and social centre, and served as a market for luxury goods and the agricultural produce of Castile – mainly grain.

19th century

As the nineteenth century progressed Madrid became more integrated into national trade networks. This was associated with the development of railways and the political and economic changes of the Liberal era, including expropriations of property from religious institutions.

Unlike many of the other cities in Spain and elsewhere in Europe, Madrid did not become a leading center of industry during the nineteenth century. Construction remained one of the principal forms of economic activity: when the first rail link was built, to Aranjuez, it was mainly used for bringing in timber for construction, as there was little industrial plant needing a supply of other materials.Juliá, S. et al. (1995), Madrid, Historia de una capital One indicator of Madrid's industrial weakness was how little the workers’ movement developed there, its center of gravity remaining in Barcelona. The founding of the PSOE socialist party and the UGT trade union in Madrid were led by Pablo Iglesias, a printing worker: publishing was another of the long-standing forms of enterprise in the capital.

20th century

The major expansion of the city's industry occurred during the 20th century, mostly in the period following the Spanish Civil War, reaching levels of industrialization found in other major European cities. The economic output of the city shifted to chemicals, metallurgy, and high-technology production including precision engineering, electronics, and pharmaceuticals. Many national and multinational companies set up headquarters in the city, encouraged by its function as the center of government. At the same time, workers’ commissions (Comisiones Obreras), although illegal under the legislation of the Franco period, were set up in the factories that now surrounded the city.

Since the restoration of democracy in the late 1970s, despite efforts to decentralize the administration, the city has continued to expand. Its economy is now among the most dynamic and diverse in the European Union.Nota de coyuntura: economía de Madrid, Becker, Bellido y Fernández (2006)

Present-day economy As the national capital, Madrid concentrates activities directly connected with power (central and regional government, headquarters of Spanish companies, regional HQ of multinationals, financial institutions) and with knowledge and technological innovation (research centres and universities). It is one of Europe's largest financial centres and the largest in Spain.Estructura Economica de le Ciudad de Madrid, Ayuntamiento de Madrid (Madrid City Council), August 2013 In 2008, 72% of Spain's largest 2,000 companies had their headquarters in Madrid. The city has 17 universities and over 30 research centres.

Although the service sector predominates in its economy, Madrid continues to hold the position of Spain's second industrial centre after Barcelona, specialising particularly in high-technology production. Its location at the centre of the peninsula permits it to articulate the long-distance transport networks of the peninsula. The comparative advantages of Madrid have been decisive in capturing the larger part of foreign investment coming into Spain in recent years. It is the third metropolis in the EU by population, and the fourth by gross internal product. Leading employers include Telefónica, Iberia, Prosegur, BBVA, Urbaser, Dragados, and FCC.

Aggregated economic activity The city of Madrid had a GDP of €124,780M in 2011. GDP per capita in 2011 was 74% above the national GDP per capita average and 70% above that of the 27 European Union member states. In comparison to the remainder of the Madrid region, the city is also substantially richer: although housing just over 50% of the Community of Madrid's population, it generates 65.9% of its GDP. The rapid growth - throughout the 1990s particularly - which converted Madrid into one of the most prosperous European cities was maintained for a large part of the decade of the 2000s, the growth rate being 3.4% pa 2000-2009. Following the recession commencing 2007/8, recovery was under way by 2014, with forecast growth rates for the city of 1.4% in 2014, 2.7% in 2015 and 2.8% in 2016.

In 2009, Madrid's per capita GDP lay 11% behind the average of the top 10 cities of the EU (it had been 14% behind in 2000). This is explained by lower rates of employment and, to a lesser extent, by lower labour productivity, but Madrid is catching up on both these factors, with productivity growing 2.5% pa in real terms.

The region of Madrid runs a heavily negative balance of foreign trade in every major class of goods: in 2013/14 exports totalled €28.97M, and imports €47.29M.

Standard of living

Income and expenditure The mean income per "unit of consumption" (a weighted count of persons) in 2010 was €17,800, which was 12% above the figure for Spain. Similarly, the mean annual spending per household in the same year was €35,683, again 12% above the Spanish average.

One downside of Madrid's rapid economic development since 1992 has been the rising cost of living. Although residential property prices have fallen by 39% since 2007, the average price of dwelling space was €2,375.6 per sq. m. in early 2014, and was second only to London in a list of 22 European cities.A comparison of UK and European cities”, City Mayors, 21 February 2013

Income distribution The proportion classified as "at risk of poverty" in 2010 was 15.6%, up from 13.0% in 2006 but less than the average for Spain of 21.8%. The proportion classified as affluent was 43.3%, up from 38.2% in 2006 and much higher than Spain overall (28.6%). The Gini coefficient, a measure of income inequality, was slightly less in the Madrid region (32.3) than the rest of Spain (34.0).

Impact of recession Consumption by Madrid residents has been affected by job losses and by austerity measures, including a rise in sales tax from 8% to 21% in 2012."'Madrid Nightlife Has Lost a Bit of Its Magic'." UMCI News (Potomac Falls, VA). Al Bawaba (Middle East) Ltd. 2015. The impact of the economic recession on spending patterns of Madrid households could be seen in a household survey in 2009: 74% said they were building up their savings, 54% were taking more advantage of sales, 47% were spending less on clothes, 44% on eating out and 42% on going to shows.

Composition of the economy by sector The economy of Madrid has become based increasingly on the service sector. In 2011 services accounted for 85.9% of value added, while industry contributed 7.9% and construction 6.1%. Services to business, transport & communications, property & financial together account for 52% of total value added. Following the recession, services and industry were forecast to return to growth in 2014, and construction in 2015.

Services

The historic dominance of the service sector in the capital is reflected in current trends, with the share of services in the city's economy growing from 82% in 2000 to 86% in 2011. The types of services that are now expanding are mainly those that facilitate movement of capital, information, goods and persons, and "advanced business services" such as research and development (R&D), information technology, and technical accountancy.

+ Contribution of services by sector to gross value added, Madrid 2009 Sector % of total VA % change 2000-09 in real terms Services to business14.5%+2.8% Transport & communication 14.3%+33.3% Property and rental11.5%+3.7% Financial services 11.5%-11.6% Retail & repair6.3%+8.3% Wholesale trade5.4%-9.0% Hotel and catering2.5%-9.2% Other private sector19.5%+3.0% Public administration5.8%+7.1% Health3.9%+16.2% Education3.1%-10.5% Recreational services3.0%-9.5% Personal services0.3%-11.0% Other public sector3.3%+10.8%

Finance and banking

Banks based in Madrid, both clearing banks and savings banks, carry out 72% of the banking activity in Spain. After many recent amalgamations the largest banking groups with an important presence in Madrid are BSCH (Banco de Santander y Central Hispano) and BBVA (Banco Bilbao Vizcaya Argentaria). The Spanish central bank, Bank of Spain, has existed in Madrid since 1782. Stocks & shares, bond markets, insurance, and pension funds are other important forms of financial institution operating in the city.

Transport

The construction of transport infrastructure, such as the ring roads and train network, constituted a major pillar of the economy up to 2006. Road, rail and air links are vital to maintain the economic position of Madrid as a leading centre of employment, enterprise and tourism. Three quarters of a million people commute into the city to work. The road network within the metropolitan region includes nine radial autovías (fast dualled highways) and four orbital ones at different distances from the centre. Some of the more recently built radial roads where tolls are charged have not been used to capacity. The region now possesses a high-capacity metropolitan road network. However, in some of the outer areas the new orbital roads have favoured the dispersion and fragmentation of residential and economically active areas.

Madrid also has a high standard of public transport provision, consisting of the Metro, the cercanías local railways, and a dense network of bus routes, with many intermodal interchanges. Almost half of all journeys in the metropolitan area are made on public transport, a very high proportion compared with most European cities.