Spain: Staying strong
After a stronger than expected first half of the year, we expect a modest easing of growth in Spain. We raised our 2019 GDP forecasts to 2.2% from 2.0%, but we continue to forecast 1.5% for next year
First-half growth surprised
The first half of the year surprised to the upside in Spain. First quarter growth increased to 0.7% quarter-on-quarter, from 0.6% in 4Q of 2018. High-frequency data of the second quarter also points to solid growth. Unemployment continues to decline, supporting consumption, and consumer sentiment stabilised after a fall at the beginning of 2018.
Businesses, however, see it a little less rosy. The manufacturing sector in particular flirts with contraction as the PMI for the manufacturing sector is close the 50. The weakness mainly lies in the investment goods sector, while growth in the consumer goods sector is still solid. A weaker overall manufacturing sector, however, is not only a Spanish problem as we see this phenomenon in many Eurozone countries.
A weaker manufacturing sector
Unemployment, debt and fractured politics
For the second half of the year, we expect an easing of economic growth compared with the first. Confidence in the future by businesses edged lower over the past few months and there are signs of faltering demand. Uncertainty also remains high, given the domestic political situation, Brexit and the trade war. Given the strong start of the year, however, we do revise our annual growth forecast for 2019 to 2.2% from 2.0%. For 2020 we continue to forecast 1.5% growth.
Compared with the eurozone as a whole, the macroeconomic situation in Spain is quite rosy as it remains one of its fastest growing economies.
The two key macroeconomic problems that continue to plague Spain are the high level unemployment and government debt. These two indicators are moving in the right direction, but they're still high compared to other eurozone countries and when you look at pre-2008 levels.
Concerning fiscal policy more broadly, the European Commission recently decided the excessive deficit has been corrected and that Spain now enters the preventive arm of the Stability and Growth Pact. It should therefore continue its efforts to reduce the debt level at a sufficient pace and to respect the expenditure benchmark. Under unchanged policies, Spain is not projected to comply with the requirements of the transitional debt rule in 2019 and 2020. It is therefore important that a new government could tackle this issue. But since the general elections in April, a new government still has to be formed.
We don't rule out another election
Currently, Pédro Sanchez, the Socialist Prime minister and the winner of the elections, is talking to other political parties. There are a number of options. He could lead a minority government, with or without Unidas Podemos with case-by-case support. There is also talk of a coalition with the liberal Ciudadanos. This set-up would have enough seats to form a majority, but so far we judge this as unlikely. The Ciudadanos leader, Albert Rivera, said that Sanchez should form a government with his partners, such as Unidas Podemos and small regional parties.
Given all this highly uncertain political environment, we don't rule out new elections should Sanchez fail to form a new government. Businesses don't like this situation but financial markets are yet to appear too concerned. The 10Y government bond spread with Germany, for example, declined fairly substantially after the April elections.
This article is taken from the Eurozone Quarterly, which you can find here
10Y government bond spread with Germany declined
The Spanish economy in a nutshell (%YoY)
Download
Download article
26 June 2019
ING’s Eurozone Quarterly: Avoiding a more serious slowdown This bundle contains 13 articles"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).