Political uncertainty threatens to tap the brakes on Spain’s fledgling recovery

September 28, 2015

Once one of the hardest-hit economies in Europe from the global financial crisis, Spain’s recent economic success sets a good precedent for the euro zone’s potential for recovery. But political machinations on the horizon could put the progress it has made at risk.

On Sunday, the region of Catalonia, which has long had a significant minority of its population agitating for independence, voted in its parliamentary election, electing a majority of the 135 seats to secessionist parties. But it did so with just 47.8 percent of the vote on a record turnout of 78 percent.

Secessionists claimed the result is a mandate to leave; the national government in Madrid, as well as financial markets, do not agree.

Economists have repeatedly warned that an exit from Spain would negatively impact both Catalonia, one of Spain’s wealthiest regions that makes up about one-fifth of GDP, and the rest of the country.¬†

Now is a particularly bad time to worry about it, not just for Spain but for the wider euro zone where the European Central Bank is trying to rekindle moribund inflation through zero interest rates and 60 billion worth of mainly government bond purchases a month. Already there was speculation that the programme would need to be expanded. ECB President Mario Draghi can use all the good economic news he can get.

“Spain’s long-term success depends on maintaining both economic and political equilibrium,” wrote¬†Mark Wall, chief European economist at Deutsche Bank. “Political risk will eventually weigh on investment and durable consumption in the second part of the year.”

That stability faced its first threat this weekend and could be shaken again when the country goes to national polls at the end of the year.

In March-June, Spain’s economy, the fourth largest in the euro zone, grew by 1 percent, handily outstripping its neighbours. It is forecast to be the fastest growing economy in the euro zone in 2015.

Much of this turnaround was spurred by a rise in consumer spending, investment, tourism, along with a fall in the euro, which makes exports cheaper.

But the revival sweeping Spain is still tenuous at best.

Most economists are predicting that Spain’s economy, which has been growing for the past two years after more than two in recession, will grow around 3 percent this year.

Low inflation and competitive prices have boosted retail sales volumes, which have grown for a year following a three-year period of contraction from July 2010-August 2013.

And although 22 percent unemployment is double the euro zone rate, it has fallen sharply from a peak of over 26 percent in late 2013.

Increasing investment and successfully implemented structural reforms have also helped the economy, with productivity getting a lift too.

But there is the lingering worry of underlying weakness, highlighted by the housing market, where prices have fallen almost 40 percent since 2008. The risk of a setback remains real.

“The main source of downside risk is the potential impact on sentiment of political developments ahead, particularly for an economy that is still very dependent on external funding,” wrote economists at Bank of America.

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