Spanish Economy Is Waiting For A Government

The Spanish economy is waiting for a new government The economy continues to grow - more than the European economy, which is expected to grow this year only 1.4% - and continues creating employment and a good rate

Joan Tapia | The Bank of Spain, by raising its growth forecast for 2019 from 2.2% to 2.4%, has confirmed that the Spanish economy has begun the year better than expected. Thus are undone the catastrophic forecasts of some analysts and the political right. The economy continues to grow – more than the European economy, which is expected to grow this year only 1.4% – and continues creating employment and a good rate. The reason is that domestic demand – household and public consumption and investment – is more dynamic than expected which compensates for the slowdown in exports – basically industrial – as a consequence of the lesser dynamism in EU economies. The economy then is going well, but  slowdown – which it would be absurd to confuse with an imminent recession – is the general tendency from which the Spanish economy cannot be isolated. Thus the growth forecasts for 2019 and 2020 are 1.9% and 1.7%. The much followed PMI index (figures above 50 indicate expansion) confirms the tendency. That of services is a positive 53.9,  compared to the European average of 52.5, but in 2017 it was 56.4. And that of industry is slowing more given that it is 50.6, above the European 47.6, but in 2017 was 10 points higher.

The synchronised slowdown is being confirmed and the next Spanish government should beware, given that public debt is very high – which makes anti-cyclical fiscal measures difficult – and the public deficit will fall little this year, from 2.5% to 2.4% according to the Bank of Spain, after falling below 3% last year, which allowed Spain to escape the group of countries under extreme vigilance from Brussels. In addition, the strongly expansive monetary policy of the ECB and low interest rates allow comfortable financing. The yield on 10 year Spanish bonds, which during the crisis reached an unsustainable 7%, is currently at the low 0.55%. And this is not just due to Mario Draghi’s policies in the ECB, but also to confidence in Spain, given that Italian bonds, which often performed better than Spanish bonds, are currently, after a year of a populist government, at 2.35%, four times higher than Spain’s.

Facing the synchronised slowdown, which the IMF has warned of, Central Banks are reversing their policies and forgetting the forecasts a few months ago that they would increase interest rates. Not only in India or the US Federal Reserve, but also in the ECB, which on Thursday 6 June delayed a possible interest rate rise to the end of 2020 and warned that its next move would not necessarily be an interest rate rise. We are facing a significant change in the policies of central banks, which are watching with concern the trade war between Trump’s US and other countries, especially China, and the disturbance which a no deal Brexit could cause, something that seems likely if Boris Johnson succeeds Theresa May in Downing Street, which in turn seems likely given that 70% of the Conservative Party members who will elect the new leader are Eurosceptics. Facing the fear of disturbance in the global economic and political order (the Trump phenomenon),  central banks have paused in normalisation, which not long ago seemed imminent. And they can do so without worries because inflation has not recovered and remains below the 2% target.

We are not looking at a worrying scenario for the Spanish economy. But it is true that there are significant uncertainties – among others, whether next October we will find ourselves with a less pragmatic ECB president than Draghi – which would suggest the rapid formation of a government with a majority and which will prioritise a solvent and coherent reaction to the environment. And things are going – and no doubt there is no other way – too slowly. The elections were on 28 April and PSOE, which had a major success in going from 84 to 123 deputies, is far from the absolute majority of 176 seats. Now we are watching the agreements to govern in the town halls and regional governments, where the main concern is whether the liberals of Ciudadanos will agree to form governments with the far right of Vox, which could confirm the division of Spain into two blocs.

About the Author

Joan Tapia
Former editor of La Vanguardia, El Noticiero Universal and Spanish public TV channel in Catalonia, Joan Tapia also advised the Minister of Economy and Finance of Spain’s first Socialist Government. One of the country’s most veteran journalists, Mr Tapia also holds a Law degree and founded La Caixa’s Information and External Relations Department. He is a regular columnist for some media outlets both in Catalan and Spanish, and a member of the Royal Academy of Economic and Financial Sciences.