Spain Economic Forecast

Sequential GDP growth cooled in Q3 from Q2. Slumping fixed investment and exports weighed on the economy. On the flipside, consumer spending strengthened on the back of falling inflation. Activity should lose further steam in Q4, due to higher interest rates and subdued external demand. In October, the manufacturing PMI fell further into contractionary terrain. Moreover, the labor market cooled and inflation rose, boding poorly for consumer spending. In politics, on 16 November, Pedro Sanchez was reappointed President by parliament after he reached a deal with Catalan separatist parties on amnesty for politicians in the region. The General Council of the Judiciary, which picks judges, warned that the deal threatened the rule of law, while the EU Commission expressed concerns. The ideological heterogeneity of its parliamentary support threatens to undermine the government’s stability.

Harmonized inflation rose to 3.5% in October from September’s 3.3%, mainly due to a softer fall in electricity prices. Meanwhile, core inflation dropped by 0.6 percentage points to 5.2%. Headline inflation will average lower next year than this, on higher interest rates and lower commodity prices. The evolution of the euro and commodity prices are factors to watch.