Spain: Despite unpredictable election outcome, economic impact set to be limited
On 28 April, Spain will hold its third general election in less than four years after Prime Minister Pedro Sánchez, head of the center-left Socialist Party (PSOE, Partido Socialista Obrero Español), called the snap vote on 15 February, just two days after parliament rejected his 2019 draft budget. As no single party is poised to win a majority of the 350 seats in Congress, the formation of a coalition will be necessary and likely to be tough. Based on current polling, it seems that three broad scenarios could emerge: First, the same coalition—comprised of PSOE, left-wing Podemos and regional nationalist parties—that helped Sánchez oust former prime minister Mariano Rajoy from office last June; second, a right-wing government composed of the conservative People’s Party (PP, Partido Popular), the center-right Citizens (Cs, Ciudadanos) and newcomer, far-right Vox; and third, the less likely option of a PSOE-Cs alliance. Zeroing in on the likely scenario becomes difficult, given the election is still a month away. Irrespective of the outcome, however, the short-term economic impact is expected to be limited. Despite the political instability that has plagued the country since the 2015 general election, the economy has performed remarkably well, with growth comfortably exceeding the Eurozone average and showing resilience more recently amid the wider regional slowdown. And while political gridlock is largely expected yet again, which bodes poorly for bold reforms, this should not derail the economy’s growth trajectory as its underlying dynamics, particularly domestic demand, remain sound.
Polls show that the PSOE is the clear favorite to win the election, with voter support potentially growing further in coming weeks as campaigning starts. However, it seems Sánchez will still struggle to put together a workable majority coalition. Notably, although Catalan pro-independence parties backed his government last time around, their support is now questionable after they sided with the opposition to reject his budget and as tensions with the region remain high. It is therefore far from certain whether this scenario will play out. If it does, the coalition will remain fragile—Sánchez’s eight-month government was the shortest in the country’s modern democratic history—and likely lead to further political stalemate, constraining the space to legislate effectively.
The second scenario consists of a right-wing coalition between the PP, Cs and Vox, along the same lines of the one recently formed in Andalusia. If successful, it would imply a notable shift in economic policy, likely turning more market-oriented and fiscally conservative. The coalition will also likely take a much tougher stance on the Catalonia issue, which risks fueling regional tensions even more. Lastly, it remains unclear whether an alliance between PSOE and Cs will work out given the arithmetic, as current polls show they fall short of reaching a majority. Moreover, the political will may not be there as Sánchez would have to backtrack on his redistributive and social spending measures—which defined his economic agenda laid out in the 2019 budget—to meet Cs in the middle, a political risk that seems unlikely he would be willing to take.
In short, it is too early to tell which political scenario will play out. Given the likely dependence on smaller regional parties to secure a majority, further compounded by Vox’s ascendancy, it is safe to say that political fragmentation will remain, making the legislative process more difficult to pass bold policy measures. Nevertheless, the short-term economic impact should be fairly limited. Spain was able to escape the recent Eurozone slowdown, which was mainly driven by manufacturing activity taking a hit from weaker external demand, by relying mostly on its domestic economy. Healthy private consumption, propped up by sustained job creation and gradually rising real incomes, contributed the most to growth last year. And while it is seen slowing in 2019, the overall expansion should remain solid and is poised to once again surpass that of the major Eurozone economies. Thus, despite likely political gridlock ahead, this should not weigh considerably on the economy’s near-term outlook.