AXA IM | Four months after the elections, negotiations to form a government officially failed and new elections will be organised on 26 June. However, it remains very unclear that their outcome will be more favourable, though probably conducive to a government as a third round of elections would be a tremendous failure. Fiscal consolidation and Catalonia’s independence will be top priorities.
It’s been two and half years since Spain set up the Independent Authority for Fiscal Responsability (AIReF) to oversee the economic targets of the different administrations and the sustainability of the country’s public finances. And now that supervisory organisation, created at Brussels’ request, can be considered as liquidated, after demonstrating its uselessness.
The Spanish Parliament’s Chairman, Mr. López, has bitterly announced that failure to guarantee a coalition government will involve new elections in late June, warning of citizens deep frustration with parties’ inability to reach an agreement. But resorting to fresh elections seems a better prospect than forming a government which is hostage to the extremist policies of the Podemos movement.
On the same day as Spain’s Economy Minister De Guindos announced new economic forecasts, which for some were completely off-the-wall, the government also announced that it will give civil servants back half of the extra payment which was suspended in 2012, worth over 550 million euros.
The International Monetary Fund (IMF)’s spring forecasts – progressively less optimistic – have nurtured the tragic sense of life (the theory expounded by Spain’s Miguel de Unamuno) or the Spanish art of flagellation. Or at least that is what the media headlines reflected, despite the fact that international observers were incapable of detecting any particularly destructive tone in the Washington-based organisation’s predictions.
It’s unheard of Spain’s tourism sector, which many experts said was stagnant and mature ten years ago, has not only massively recovered but continues to beat records from one year to the next in terms of numbers of international tourist arrivals. Since it touched bottom in 2009, with 52.2 million foreign tourists, the sector has not stopped growing any year. In 2015, numbers reached 65 million, up 31% in comparative terms.
Data from the Bank of Spain illustrates a turning point in the accounts of non-financial companies in 2015. That said, against the backdrop of political uncertainty there is a risk that the value of this will not be unlocked so that Spanish companies can face the current challenge of increasing their size.
The government has raised its deficit forecast for this year to 3.6%, thus failing to comply with the objective agreed with the European Commission (2.8%). But Guindos is confident that the Spanish economy will be able to apply an adjustment equivalent to 1.4 percentage points of GDP, over 14 billion euros. But the experts do not believe that the economy can deal with such a large adjustment.
It’s straight out of the textbook that low inflation – and above all deflation – has negative effects on economic growth that we all know about. That’s the main reason why ECB President Mario Draghi implemented an ambitious set of monetary expansion measures in March, with the aim of boosting prices to a level more suitable for economic growth, namely 2%.
Maximising profits is the main objective of any company and the banks are not alien to this situation. The current scenario is particulary challenging for the profitability adjustment of the sector in Europe and the adjustments made by the Spanish banks are proof of this.