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Spain: the soft landing of growth continues


Economic activity is slowing. General elections held on November 10th could lead to the formation of a government, but do not really clarify the political situation.

TRANSCRIPT // Spain: the soft landing of growth continues : December 2019



François Doux: Turning first to Spain which held parliamentary elections last month. We are joined by Frédérique Cerisier. Hello.


Frédérique Cerisier: Hello François.


François Doux: Before discussing the political developments in Spain, let’s look at its economic performance. Obviously, one thinks back to the crisis in 2008, which hit both the banking and real estate sectors, since when we have seen a recovery in the Spanish economy.

Has this continued?


Frédérique Cerisier: Yes, of course. We still picture a country in full recovery. Overall, the past five years have witnessed an average economic growth of 3% in Spain. In 2019, it will be a little over 2%, a high and enviable level for many of its European neighbours.

That said, the slowdown that is settling in Europe is also affecting Spain, and more specifically as changes to its economic model that were born of the crisis have made the country a bit more dependent on exports than it was in the past.


François Doux: On the topic of exports, does this mean that the Spanish economy will deteriorate over the next few months?


Frédérique Cerisier: Yes, slightly. Once again, we can see that growth has slowed down only very gently so far. This has notably been the case as growth has been supported by domestic demand, household consumption and corporate investment. But survey data are deteriorating, particularly in the manufacturing sector. For example, Purchasing Managers’ Indices have clearly settled in contraction territory since the summer.

The last significant element to bear in mind is that the labour market is starting to slow down. Job creation has been strong in recent years, but has decelerated to below 2% in the third quarter of 2019, a 5-year low. Meanwhile, given the past vitality of the labour market, the supply of labour by the active population has rebounded.


François Doux: Does this mean that Spanish unemployment will rise?


Frédérique Cerisier: Perhaps not by very much. What is clear is that it has stabilised throughout 2019 at a still-high level of over 14%. As a result, even though we are not expecting a significant increase in unemployment over the next few quarters, it is clear that a slowing of job creation will weigh on domestic demand and slightly reinforce the slowdown in growth.


François Doux: So now let’s turn to the political situation. Spain has had four elections in four years. It went to the polls in April of this year, and then again on 10 November. What was the outcome?


Frédérique Cerisier: Well, no fundamental change actually, although there have been fairly significant shifts in the right wing, with a collapse in the number of centrist Ciudadanos representatives and a new leap forward for the far right party, which became the country’s third political force. On the left, there has been no change in the balance of power. The leading party remains Pedro Sanchez’s socialist party, but they have gained no ground and only received just under 30% of the votes. As a result, the Congress of Deputies remains highly fragmented.


François Doux:  So will Pedro Sanchez, the former head of the government, and the leader of the socialists, be able to form a new government in the end?


Frédérique Cerisier: Despite everything it is possible, because the outcome of the vote forced him to seek an immediate agreement in principle with the radical left party Podemos to form a minority government. However, this might not be enough, precisely because this would be a minority coalition. To form the government, this coalition would have to hope for the “friendly” abstention of other members of the Congress of Deputies.
Such support could come from the centrist Ciudadanos party, which has seemed unwilling to provide it so far, or from some of the constellation of regional and nationalist parties also represented in the Congress of Deputies. In particular from Catalan separatist representatives, who would once again hold the role of arbitrators in the assembly.


François Doux: So this difficulty in forming a government, building a stable parliamentary majority, could persist after each fresh election in Spain?


Frédérique Cerisier: Yes, if there is a minority coalition in power the question will arise each time. We can expect difficulties to form a government, but also to implement policies. More generally, it will be difficult for the coalition to survive. Seen from this angle, the length of a full legislative term seems like a very long time indeed.


François Doux: One crucial question to end on. What economic impacts has this political instability created and what can we expect?


Frédérique Cerisier: Over the past several years we have seen a fairly rapid succession of fragile governments in Spain, with, in some cases, fairly long transition periods between two governments. In the short term, this has not had a particularly strong impact on the country’s economic trends. We have seen that the country has enjoyed a rapid economic recovery in recent years, with no major setbacks.

However, over the years, this has had an impact on the difficulty in carrying out reform policies, which require time and political capital, two things that the various governments have not had in the recent past, despite the fact that the country still faces structural challenges, notably in the labour market.

Fiscal policy provides another good example. The most recent budget that passed in Spain was for 2018, and it was not voted until the middle of that year. No budget was voted for 2019, and we can already say that it will be difficult to pass one for 2020, with probably a great deal of wrangling.

So, once again, this will not prevent the Spanish economy or government from functioning in the short term. But one of the consequences has been that the country has not been able to take full advantage of the extremely favourable conditions of the past few years, for example to further consolidate its public finances.


François Doux: Thank you, Frédérique Cerisier, for this update on Spain’s economic and political situation; there is so much to keep an eye on both in Madrid and in Barcelona.


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