Spain: Risk Assessment
Country Risk Rating
Business Climate Rating
- Reform measures (labor market, banking sector, bankruptcy law, etc.)
- Renewed competitiveness and strengthened export sectors
- Improvement in the financial situation of companies
- High-quality infrastructure
- Significant tourism potential
- High levels of private and public debt; very negative net external position
- Labour market duality; high structural unemployment
- Large number of small, unproductive companies
- Fragmented political landscape; national unity threatened by independence drive in Catalonia
Sluggish economic growth in 2019
Spanish growth was already showing signs of slowing in 2018. Growth is expected to moderate further in 2019. The labor market will remain on a positive trend, with a continued decline in the unemployment rate, but job creation is projected to be less dynamic. The slight acceleration in wages, driven by the minimum wage hike and the increase in public sector pensions, should lead to a rise in disposable income. However, this gain will mainly benefit savings. Household consumption is set to decline further, especially in durable consumer goods. Conversely, accommodative financing conditions should continue to support growth in residential construction. The vigorous real estate market will likely continue to fuel the surge in investment, hampered by a slight slowdown in the corporate sector. Despite an external environment characterized by a high level of uncertainty over increased protectionism and a gloomy outlook in the eurozone, net exports are once again expected to make a positive contribution. As the effects of euro appreciation dissipate, exports are set to strengthen as they continue to capitalize on competitiveness gains.
The budget deficit is gradually narrowing, but by less than required under the stability programme
The strong economic recovery since 2015 combined with fiscal consolidation under the European Excessive Deficit Mechanism have contributed to a gradual readjustment in the country’s public finances. Spain, the last eurozone country still subject to the corrective arm of the Stability and Growth Pact, emerged from the mechanism in 2018 with a government deficit of less than 3%. In 2019, the deficit is expected to continue to shrink, but it is difficult to determine to what extent. Pedro Sanchez’s socialist government presented its budget proposals to the Commission in October 2018, but has yet to have them approved by both chambers of the Spanish Parliament. Despite the support of the radical left-wing Podémos party, the government has only a slender majority and will struggle to get its budgetary policy ratified. The finance law presented by the government proposes to cut the government deficit to 1.8% of GDP. Expenditure is expected to decrease only slightly and to finance new social measures such as the increase in social security contributions due to the hike in the minimum wage, the indexing of pensions to inflation and the increase in social transfers (child protection, long-term care and paternity leave). These measures will be financed by increasing the taxation of dividends from large companies (domestic and foreign), as well as high-income households, and by introducing new taxes, including environmental, digital services and financial transaction taxes. If the budget is not passed, the 2018 budget will be repeated, leading, on a constant policy basis, to a smaller reduction in the government deficit (2.2% of GDP) and an unchanged structural balance. Presented as part of the European semester, the Spanish budget was rejected by the Commission, which considers that even if Pedro Sanchez were to implement these measures, the government and structural deficits would still exceed those set by the government, breaking the commitments made under the Stability Programme. Public debt is expected to decline only slightly, at a slower pace than that set by the stability programme. However, this decline is mainly due to cyclical factors such as lower interest rates and higher inflation.
With a fragile government, snap elections could be on the way in 2019
In May 2018, Pedro Sanchez, the leader of the Spanish Socialist Party (PSOE), won, for the first time in the history of Spanish democracy, a non-confidence motion against former Prime Minister Mariano Rajoy after the verdict in the Gurtel case found that Popular Party members were involved in a corruption scandal. The socialist government, which is supported by the radical left-wing Podemos Party and the Catalan and Basque independence parties, remains on a fragile footing since it has a tiny majority with only 80 deputies. It is therefore at the mercy of the independence vote, particularly that of the Catalan party, making it dependent on relations between the State and the region. Accordingly, Mr Sanchez’s government may have great difficulty passing its budget, which is the cornerstone of its social policy, especially since the PSOE does not hold a majority in the Senate. Parliamentary elections could thus be called. Since it is well ahead in the polls, the PSOE has not ruled out calling elections, but the party will have to choose the best time to do so. Various elections are already scheduled to take place in 2019, with municipal, regional and European elections all being held on May 26, 2019. In the regional elections held in December 2018 in Andalusia, the bastion of the Spanish left, the PSOE, which has run the region since 1982, failed to obtain a majority.