Articles
31 August 2018

Spain: Political tensions set to increase while the economy decelerates

Approving the 2019 budget and the Catalan situation will prove difficult for the minority government. Meanwhile, weak retail sales in July give further evidence of the deceleration of the Spanish economy

image-170926-spain_protests.jpg
Shutterstock
In this article

The next few weeks promise to be stressful for Pedro Sánchez, the Socialist leader of the minority government, as his government will be confronted with a number of thorny issues.

In a few days, there will be a second parliamentary vote for the 2019 budget. At the end of June, parliament rejected the draft 2019 budget, which was the first serious blow for the minority government. Only 88 members of parliament (out of 350) voted in favour of the plan. The Spanish far-left party Podemos, which has 67 seats, did not support the draft budget as it wanted softer deficit targets. Sánchez, on the other hand, repeated the importance of fiscal discipline and to continue to pursue the deficit target of 2.2% of GDP. Finding a compromise will be difficult, and as the draft budget should be submitted to Brussels by 15 October, the pressure will rise.

We still expect the Spanish economy to grow by 2.6% in 2018, compared to 3.1% in 2017

The second important political point is the situation in Catalonia. On 11 September, Catalans celebrate the National Day. Quim Torra, Catalonia’s President, has already called for street protests to call for the region’s independence. A few weeks later, on 1 October, there is the first anniversary of the referendum. Sánchez will have to tread carefully, as he needs the support of the nationalist parties in parliament.

Meanwhile, evidence of the deceleration of the economy is mounting. The first hard data for the third quarter doesn't show much movement compared to the second quarter. Retail sales in July fell by 0.4% year-on-year, compared with -0.1% in June. The uptick in inflation, from around 1.0% to above 2.0% in recent months, explains the weak performance.

The pick-up in inflation hampers the upward potential of retail sales

Source: Thomson Reuters
Thomson Reuters

The dampened retail sales are one of the reasons why we don't expect an acceleration of the economy in the coming months. Another is the continued decline of the PMIs in July for both the manufacturing and services sectors.

A slowdown, however, doesn't mean the economy is doing badly. The past growth rates were just extremely high. We still expect the Spanish economy to grow by 2.6% in 2018, compared with 3.1% in 2017.


Disclaimer

"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.

This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.

The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.

Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.

ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).