Joan Tapia | The downward revision of growth in Spain in the second quarter (from 0.5% to 0.4%), following that of the first quarter (from an optimistic 0.7% to 0.5%), and a slower rate of job creation, have disturbed forecasts and the economic climate.
The Bank of Spain has lowered the growth rate for this year from 2.4% to 2% and the Minister of Economy, Nadia Calviño, who before the summer talked of increasing the government´s forecast of 2.2%, has just admitted that the revision, in the budgetary forecasts which she must send to Brussels on 15 October, could be downwards. The reality is that current growth (the second quarter of 2019 over the same quarter last year) is already at 2%. And it is hard to see how it could increase in the second half of the year.
The good news is that the economy continues to grow because of the good export performance – despite the contraction in international trade – which mitigates the effects of the slowdown in consumption, due to the recovery in the rate of savings, which could result from both increased worries about the future and the fall in the demand stored up by the last crisis. The good export news also serves as a counterweight to the bad indicators for investment and industry. The reality is that, while the PMI for services remains above the middle point of 50 – although falling – that of manufacturing industry has already spent two quarters showing contraction.
On the other hand, the recovery in the rate of savings – now 8.7% of disposable income, having fallen to 5% – is good news in the medium and long term, but in the short term implies a fall in consumption with negative impact on the situation.
This slowdown – which the majority of analysts do not believe will lead to a recession, at least in the short term – is worrying especially because of the political instability which has reigned since the end of 2015, despite holding 3 elections in that period. Until now, in an upward cycle, it has not had appreciable consequences, but it is doubtful that it will remain the same as the global economy starts on a downward cycle and when the obligatory repetition of elections – because of the political class´s inability to form governing coalitions – has been confirmed for 10 November. And conceivably we will have a provisional government until December or early 2020. At the moment the absence of a government with full powers is very negative. It would be even worse if the 10 November elections reproduce the inability to form a coalition. We would enter in the zone of high risk.
A kind of two-party system?
At the moment the country´s climate has clouded over, which cannot have a positive influence. Thus the consumer confidence index, which oscillates between 0 and 200, and in which below 100 indicates pessimism, and which in June was in the comfortable zone (102.3), has been falling steadily to reach a pessimistic 80.7 in September. How could this affect the elections? In favour of the opposition, fundamentally the PP, if the blame is placed on the current government and the sense of protest grows. On the other hand, in favour of PSOE, if the current government seems best placed to deal with the crisis. What seems clear is that the new parties – which have not shown sufficient political capacity since the April elections – will be unable to generate any sense of security and could be punished. Are we returning to a kind of two-party system?
So the Spanish economy will depend much on the result of the elections. It remains to be seen, but as of 7 October and based in the published polls – the latest that of El Periodico de Catalonia on 6 October – PSOE will win the elections again with a similar number of seats, the PP will rise by some thirty seats, Ciudadanos could lose half of its seats and Podemos will trend downwards because of the entry of Errejon (ex-Podemos leader), who in addition makes clear the inability to form coalitions of Pablo Iglesias.
With this result, in which the balance of the left and right wing blocs would remain almost the same, the panorama can only improve slightly. Iglesias, diminished, could not veto a government supported by Errejon and the PNV. And even by the Catalan ERC, provided the effect of the Supreme Court sentence of the Catalan separatist prisoners does not poison everything.
But perhaps the most encouraging fact for the formation of a government is the change of tone in Ciudadanos and the PP. After the never “on the side of Sanchez”, Ciudadanos leader Albert Rivera, punished in the polls, is now opening up to new possibilities. And PP leader Pablo Casado, reinforced but probably still below 100 seats (he now has 66), would have more interest in strengthening his reputation as a statesman for the future rather than continuing to block Sanchez. A possible abstention by the PP in the election of Sanchez as PSOE did – against the wishes of its current leader – in the election of Rajoy at the end of 2016?
It is a scenario that now seems more realistic than a month ago. But even if Sanchez is elected Prime Minister, how will he get his budget through? Would it be easier with an alliance of the left or with a commitment with the centre and right? In both cases it would be complicated.
Without forgetting that the first test of governability will come after the sentence of the Supreme Court on the separatist prisoners, which could cause violent protests in Catalonia. Conclusion: the economy is slowing and there are too many political uncertainties over the future.