Spain: Economic growth remains firm in Q2 despite political impasse
August 25, 2016
The Spanish economy held steady in the second quarter despite the political gridlock that has plagued the country in the past eight months. The economy expanded 0.8% compared to the previous quarter on a seasonally-adjusted basis, according to comprehensive data released by the National Statistics Office (INE) on 25 August. The expansion was on a par with the first quarter’s figure and slightly above the preliminary estimate of a 0.7% increase, which had already exceeded FocusEconomics panelists’ expectations of a 0.6% expansion. The Spanish economy has proven to be resilient to both internal and external shocks, achieving 12 consecutive quarters of growth and managing to outperform the rest of the Euro area.
The expansion mainly reflected a surge in exports, which offset weaker dynamics in domestic demand. The net contribution of trade to overall growth swung from minus 0.9 percentage points in the first quarter to plus 2.5 percentage points in the second quarter. The result marked the highest reading since Q4 2012 and was largely driven by an increase in goods exports to non-EU countries and a resilient tourism sector. In Q2, exports expanded 4.3%, which contrasted the 0.4% decrease seen in Q1 and marked the largest increase on record. In addition, Spain’s improving economy fueled healthy demand for foreign goods and services. Imports grew 2.7% in Q2, which was well above Q1’s 0.4% expansion.
Meanwhile, the domestic sector proved resilient but deteriorated in the second quarter, largely on the back of subdued public spending. Private consumption grew 0.7% in Q2 (Q1: +1.0% quarter-on-quarter), the slowest pace since Q3 2014. While an improving labor market, low inflation and subdued interest rates continued to support household spending, decelerating wage growth and a moderate recovery in oil prices weighed on private consumption. Moreover, growth in government spending swung from a 0.7% expansion in Q1 to a 1.6% contraction in Q2, as fiscal constraints on the back of efforts to curb the deficit dragged on public finances. Conversely, fixed investment accelerated notably and expanded 1.3% in the second quarter, which was well above the 0.3% increase in the previous quarter. The result in investment was driven by favorable financial conditions and healthy company profits.
The economy expanded 3.2% compared to the same quarter of last year. The result marked a slight slowdown over the 3.4% expansion tallied in the previous quarter, but growth remains healthy compared to historical levels.
While Spain’s economic performance has so far managed to remain largely unscathed from the political stalemate, the ongoing failure to form a new government continues to pose downside risks to the economy. After eight months of political deadlock, the conservative People’s Party (Partido Popular, PP) drafted a preliminary agreement with the newcomer Citizens party (Ciudadanos, C’s) whereby the latter would support Mariano Rajoy’s appointment as prime minister subject to the PP’s acceptance of several amended conditions focused on anti-corruption measures and electoral reform. However, Spain’s notably fragmented legislature means that the Citizens party’s support would not be enough for Rajoy to win the investiture vote set to take place on 31 August, falling seven votes short of the requisite absolute majority of 176 favorable votes. If he fails in the first round, a second round will be held on 2 September, where only a simple majority would be needed. This would also require support from either some of the Socialist party (Partido Socialista Obrero Español, PSOE) or smaller parties. The final deadline to form a government before Parliament is dissolved is 31 October. Dissolving Parliament would lead to a third round of elections and heightened political uncertainty. Moreover, the constitutional deadline for the 2017 draft budgetary plan to be submitted to Parliament is 1 October. Failure to do so would make it very difficult to comply with the requirement to submit the budget to the European Commission by 15 October, which would trigger sanctions estimated to amount up to 0.5% of the Spanish GDP.
Author: David Ampudia, Economist