Spanish economy defies political turbulence

The ongoing Catalonian conflict was followed in June by a government crisis. The former conservative prime minister Mariano Rajoy was replaced by the Social Democrat Pedro Sanchez following a constructive vote of no confidence that was called in the wake of a far-reaching corruption scandal. But instead of calling new elections, Sanchez is seeking to carve out a profile for himself as prime minister. He does not have much room for manoeuvre. With barely 84 mandates – out of 350 – he leads the smallest minority government in Europe.

However, the consequences of the change of government for economic growth have been very limited so far, as recently shown by the strength of several leading indicators. A preliminary estimate from the Spanish central bank also attracts positive attention: according to the estimate growth will probably have stabilized in the second quarter at a high quarter-on-quarter rate of +0.7 per cent.

On the domestic political stage the Catalonian conflict continues to play a major role. After the change of Spain’s central government the new prime minister Pedro Sanchez announced that he intended to defuse the situation. A Spanish head of government and a Catalonian regional president recently came together for talks for the first time in two years. No results are expected as yet. The meeting was intended to send the first signals of détente in the highly intractable conflict. In the talks both sides again underlined their demands, but also said they intended to maintain the dialogue.

Even though the many latent problems that are smouldering in Spain are hardly reflected at the moment in the economic indicators, it is high time that important economic policy problems were addressed. The EU Commission’s recently published “Post-Surveillance” report for Spain also draws attention to this. While the report credits the country with a marked economic growth dynamic, at the same time it also draws attention to familiar problems such as, for example, the high unemployment rate or the large national debt.

Overall, economic growth is likely to continue to benefit from a robust increase in investments and the solid dynamic of private households in the wake of the recovery in the labour market. However, the indicators suggest that the foundations are gradually wearing thin: in the second half of the year economic growth may well be expected to slow. But for 2018 a strong 2.5 per cent year-on-year growth rate should still be possible, which would be significantly higher than the 1.9 per cent forecast for the euro area.

 

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