Spanish elections cast a shadow over the economic outlook
Spanish elections show a divided political landscape with no clear winner, raising the possibility of new elections. Ongoing political uncertainty is casting a shadow over the economic outlook, hampering fiscal and other necessary economic reforms
Last night the Spanish elections ended in a thriller. The margin between the left and right blocs proved much smaller than expected, revealing a fragmented political landscape with no clear winner. The centre-right People's Party emerged as the largest party in the polls but failed to achieve an absolute majority. Even with their preferred far-right coalition partner Vox, they did not get enough seats to form a right-wing government. As a result, Alberto Feijóo, the leader of the People's Party, might try to form a minority government, although the chances seem slim.
While the course of events in the coming weeks remains highly uncertain, it is not out of the question that Socialist prime minister Pedro Sánchez will retain his position in La Moncloa. A plausible scenario could be that Sánchez once again forms a left-wing government, together with the far-left Sumar. However, this would mean that he would have to count on the support of regional parties that have already declared their intention to demand significant concessions in exchange for their support.
In the coming days, all political leaders should meet with King Felipe VI, who will ultimately decide which party or coalition has the best chance of forming a viable government. The current election result indicates a strong likelihood that neither Feijóo nor Sánchez will be able to establish a government, leaving weeks of political uncertainty ahead, leading to new early elections in the country.
Impact on Spain’s economy and EU presidency
Ongoing political uncertainty and the prospect of new elections may introduce an element of instability to the Spanish economy. This situation could hamper the country's long-term growth prospects through delays in implementing essential economic reforms. Moreover, it risks hampering efforts to improve Spain's public finances through necessary fiscal measures. One advantage is that the process of government formation in Spain has a time limit. If no prime ministerial candidate gains the support of a majority in parliament within 60 days, new elections are triggered.
This scenario could also be detrimental to the European Union as Spain currently holds the EU presidency. Several important reforms are on the agenda in the coming months. For instance, reforms to the Stability and Growth Pact must be approved before the end of the year. Otherwise, the old system will come back into force, forcing countries to adopt stricter austerity measures. In addition, one of the spearheads of the Spanish presidency was finalising the Mercosur deal. This also risks being delayed if the political impasse persists for long. While a caretaker Spanish government will surely still manage the EU presidency, the prospect of new elections could jeopardise its effectiveness.
While ongoing political uncertainty and the possibility of another snap election could cast a shadow over the economic outlook, we should not overestimate the short-term impact either. Political uncertainties aside, the Spanish economy is expected to slow down in the coming months on the back of a slowdown of the world economy and the interest rate hikes of the European Central Bank. The ongoing recovery of the tourism sector is the main growth driver this year. However, its positive impact will fade later this year and next.
For this year, we assume average GDP growth of 1.9% for 2023, implying a slowdown in the second half of this year.
"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).