Spain: Growth up, political risks – HSBC

Fabio Balboni, European Economist at HSBC, GDP growth could have picked up in Spain in Q1 2017 thanks to strong job creation and deficit reduction seems on track, although it might be harder to reduce the debt-to-GDP ratio this year. In addition, the socialist party primaries and the possible independence referendum in Catalonia could lead to some political uncertainty.

Key Quotes

“The economy keeps rolling. GDP growth could even pick up in Q1 2017, with most seeing quarterly GDP growth of 0.8% q-o-q (from 0.7% in Q4 2017), compared to our forecast of 0.7%. This is mainly due to the strength of employment growth.”

“Notwithstanding this, most economists still see growth slowing after Q1, due to higher inflation (although it has already come down significantly from the February peak at 3% y-o-y), the return of some fiscal restraints, diminishing marginal returns from loose monetary policy, and possibly slowing tourism. But more upside surprises are possible, including the construction sector as it seems to be showing signs of life.”

“The main elements of uncertainty and disagreement among economists are whether higher inflation could translate into higher salaries, supporting private consumption but possibly leading to a slowdown in employment growth, and whether we could see a return to some external imbalances in the future.”   

“On the fiscal front, most economists seemed confident that, after meeting last year's (revised) EU deficit target (4.6% of GDP, the deficit was 4.54%), Spain seems broadly on track to meet this year's target (3.1%). So far, debt-GDP has been stabilised by draining the social security reserve fund, but with this almost exhausted it could be harder to reduce debt in the future. The structural deficit is also a reason for concern.”

“Politics is back

• The primaries to elect the new leader of the socialist party, PSOE, will take place on 28 May. Depending on who wins, we could see a shift of the party to the left (Pedro Sánchez) or the centre (Susana Díaz), with a risk of a possible party split and, particularly in the first case, a tougher opposition to the PP-minority government. 
• While we were in Madrid, the Catalan government's leader presented draft questions for the possible independence referendum in September. His determination may lead to an escalation of tensions between Madrid and Barcelona, which may affect the economy.”