Perspectives

The new coalition takes its first steps

st  
16  
EcoPerspectives // 1 quarter 2020  
economic-research.bnpparibas.com  
Spain  
The new coalition takes its first steps  
Although Spanish growth remains solid, it is by no means sheltered from the European slowdown. In 2020, growth is expected to  
continue slowing to about 1.7%, after reaching 2% in 2019. The slowdown is also beginning to have an impact on the labour market.  
From a political perspective, Pedro Sanchez was the winner of November’s legislative election, although he failed to strengthen the  
Socialist party’s position. He was invested as a prime minister in early January by Parliament and he will lead a minority coalition  
government alongside the extreme left Podemos. The coalition will depend on the implicit support of some regional and nationalist  
parties, notably the pro-independence Catalan ERC party.  
Spain is expected to continue to rank among the fastest growing  
1
- Growth and inflation  
major European countries this year. After reporting an average  
annual growth rate of nearly 3% for the past five years, the Spanish  
economy apparently grew nearly 2% in 2019, well above the  
eurozone average.  
GDP Growth (%)  
Inflation (%)  
Forecast  
Forecast  
2
.9  
2.4  
2.0  
1
.9  
Soft landing  
1.7  
1.7  
1.6  
It goes without saying that the slowdown that has swept Europe has  
also hit the Iberian Peninsula, especially since its economy is much  
more open than in the past: exports of goods and services now  
account for nearly 34% of GDP in volume, up from 26% in 2007.  
Even so, the slowdown has been rather gradual so far, thanks  
notably to the resilience of domestic demand. Household  
consumption and corporate investment rose 1.4% year-on-year and  
0.8  
20  
0.9  
0
.8  
17  
18  
19  
20  
21  
17  
18  
19  
21  
Source: National accounts, BNP Paribas  
2
.4%, respectively, in the third quarter. As to the year-end period,  
the Bank of Spain estimates that growth probably maintained a  
quarterly rate similar to that of the two previous quarters (0.4% q/q).  
Based on the information available so far, we expect retail sales to  
hold up strongly in the year-end period, while automobile exports  
rebound.  
2- Activity in services is resilient  
PMI (points)  
--- Composite PMI ----- Manufacturing PMI - - - - Services PMI  
70  
65  
6
5
5
4
4
3
3
2
0
5
0
5
0
5
0
5
Purchasing manager surveys seem to concur with the idea of a  
growing decoupling of trends between the industrial and service  
sectors: industrial output has been contracting for the past few  
months while the service sector is much more resilient (see chart),  
buoyed notably by household demand, the turnaround in the  
housing sector and tourism. In the future, household income and  
behaviour will certainly play a key role in determining the resilience  
of Spanish growth. From this perspective, the news is mixed.  
Bolstered by job creations and wage increases, nominal disposable  
household income has increased by more than 3% year-on-year for  
the past two years, and continued to accelerate in mid-2019. As a  
result, Spanish households have been able to rebuild their savings.  
Spain’s household savings rate is low compared to the European  
average, but it has picked up strongly since the beginning of 2018.  
This newfound manoeuvring room could prove to be handy just as  
the slowdown is beginning to have an impact on the labour market.  
With nearly 2.5 million job creations since the job market bottomed  
out in year-end 2013, job growth fell to just 1.8% year-on-year in Q3,  
the lowest level in the past five years, while the unemployment rate  
has levelled off in recent months at a very high level of 14%.  
2007  
2009  
2011  
2013  
2015  
2017  
2019  
Source: Markit  
Spain’s fragmented political landscape. This fragmentation has  
increased constantly since Podemos and Ciudadanos burst onto the  
political scene (around 2015), bringing to an end the bi-party system.  
Divisions have only increased with the four general elections the  
country has held over the past four years. On the left, the balance of  
power was basically unchanged by November’s election compared  
to the April 2019 results, with the Spanish Socialist Party (PSOE)  
winning 120 seats, or barely a third of the total in the new assembly,  
and Podemos winning 35 seats. On the right, the election was  
mainly marked by the collapse of the centrist party Ciudadanos,  
which lost four fifths of its seats to the Popular Party (89 seats), and  
by a new surge in the extreme right Vox party, which more than  
A fragile coalition  
As polling data suggested, Pedro Sanchez came in first in the 10  
November legislative elections, albeit without bringing together  
st  
17  
EcoPerspectives // 1 quarter 2020  
economic-research.bnpparibas.com  
doubled its number of seats. Vox is now the country’s third largest  
political power.  
3
- Minority coalition  
Political groups in parliament following the November 2019 elections, by number of  
seats  
After several weeks of negotiations, Pedro Sanchez finally won  
approval in early January to head a PSOE-Podemos minority  
coalition government, thanks to the support of the Basque  
Nationalist Party PNV and the fortuitous abstention of the regional  
parties, notably the pro-independence Catalan Republican Left party  
(
ERC).  
Economic and institutional policies: walking a tight  
rope  
What sort of policies, direction and scope of action will this minority  
coalition take? The investiture vote shows that Pedro Sanchez can  
only count on a very small majority of just 2 votes in the house of  
1
deputies . Consequently, we can expect to see frequent power  
Source: Wikipedia  
struggles throughout his mandate, as his various partners test the  
strength of the coalition. On the Catalan question, to win the ERC’s  
support, Mr. Sanchez had to agree to open talks with the regional  
government and to submit its conclusions to voters in the region.  
Although renewing a dialogue is good news, a long and winding  
road lies ahead, because the two parties do not seem to have the  
same vision of the content and objectives of the talks (the Socialist  
want to reform its autonomous status while the ERC wants the right  
to self-determination).  
4
%
- Budget forecast  
of GDP  
Fiscal balance,  
Public debt ratio  
4
2
0
110  
100  
90  
80  
70  
60  
50  
-2  
-4  
-6  
-8  
As to economic policy, it is worth recalling that after the April 2019  
elections, Pedro Sanchez refused to form a coalition government  
with Podemos. He finally agreed to do so because this was the only  
feasible option after November’s election. The coalition agreement  
between the two parties calls for higher taxes for big wage earners  
and major companies, and a minimum wage increase. To be more  
specific, the income tax rate on individual households would be  
increased by 2 percentage points for those making more than  
40  
30  
20  
-
10  
12  
-
2007  
2009  
2011  
2013  
2015  
2017  
2019  
Source: European Commission, 2020 fiscal plan dated October 2019  
130,000 a year, and by 4 points for those earning more than  
300,000. Above €140,000, the capital gains tax would also  
2
restrictive economic policy is highly unlikely . He will be walking on  
a tight rope, especially in the midst of an economic slowdown. In  
2019, the country already fell short of its targets, and the fiscal  
deficit apparently levelled off at 2.5% of GDP according to the Bank  
of Spain, compared to last October’s forecast of 2%.  
increase by 4 points to 27%, from 23% currently. Lastly, the  
corporate tax reform would ensure a minimum tax rate of 15%,  
which would be raised to 18% for banks and oil companies.  
In terms of spending, the coalition agreement calls for increased  
spending on public services, including healthcare, education and  
housing. Certain family benefits would be raised and pensions  
would be indexed to inflation again. Lastly, even though  
unemployment has levelled off at a very high rate in recent quarters,  
the government also plans to continue raising the minimum wage  
(
after +8% in 2017, +4% in 2018, and +22.3% in 2019), gradually  
increasing it to 60% of the average wage within the next four years,  
equivalent to another increase of roughly 30%).  
(
At this stage, the 2020 budget has not been officially announced yet,  
much less approved. Pedro Sanchez still wants to guarantee a  
certain degree of fiscal responsibility, although a resolutely  
1
Pedro Sanchez did not win investiture until the second round of voting, during  
2
which he needed only a simple majority of deputies to win. Thanks to the  
abstention of a certain number of deputies, the Socialist was able to win the  
investiture and form a minority government, with 167 votes in his favour and 165  
against.  
Despite European Commission recommendations to the contrary. As part of  
the preventative framework of the Stability Pact, the EC recommended that  
Spain continue to pursue fiscal consolidation efforts as long as the structural  
public finance deficit was not near an equilibrium.  
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