Spain: Coalition talks create uncertainty but unlikely to dent near-term economic outlook
Spain’s general election on 28 April delivered a more fragmented Congress amid the breakthrough of the far-right Vox party as a major political force. Moreover, as anticipated by earlier polls, the center-left Socialist Party (PSOE, Partido Socialista Obrero Español), led by Prime Minister Pedro Sánchez, won the largest share of seats in parliament but fell well short of a majority. Unable to govern on its own, PSOE will attempt to build a workable coalition which, according to election results, would likely be composed by it, its left-wing ally United We Can (UP, Unidas Podemos) and smaller regional parties—a bloc similar to the one which backed Sánchez’s successful no-confidence motion against his predecessor Mariano Rajoy last June. Coalition talks are poised to take weeks or even months, however, and could be further complicated if Catalan secessionist parties—which sided with the opposition to defeat Sánchez’s 2019 budget plan in February triggering the election—are to play a key role in the coalition. That said, although the election outcome and prospects of lengthy negotiations have increased political uncertainty ahead, which bodes poorly for bold reforms, this should not derail the economy’s growth trajectory and near-term outlook as its fundamentals remain strong.
PSOE was the clear winner of the election, securing 123 seats in the 350-seat parliament, a significant improvement from the 85 won in the 2016 election. The right-wing People’s Party (PP, Partido Popular) came in second but was severely punished by voters as it garnered only 66 seats, less than half of the 137 won in the previous election and the worst result in the party’s history. The PP was followed by the center-right Citizens (Cs, Ciudadanos), which almost doubled its share in parliament by winning a solid 57 seats (2016: 32 seats). Meanwhile, UP, which lost voter support, came in fourth place, securing only 42 seats (2016: 71 seats). Lastly, the big winner in the right-wing bloc was Vox, taking over 24 seats from zero and marking the first time a far-right party enters the main political stage since the early 1980s.
The economy is expected to largely shrug off the increased polarization and parliamentary fragmentation that looms, however. Despite the political instability that has plagued Spain since the 2015 general election, the economy has managed to grow at a robust pace, outperforming the Eurozone average and showing resilience more recently amid the wider regional slowdown. And while growth is set to ease this year, it should remain firm and poised to exceed that of the major Eurozone economies. Moreover, public finances have improved in recent years, and given the likelihood that the eventual government will remain committed to cutting the deficit and debt in line with EU fiscal rules, the risk of substantial fiscal slippage is slim. Lastly, Spanish 10-year bond yields have declined steadily, down by over 40%, since their spike last October when Sánchez unveiled his 2019 budget and hovered near 18-month lows in the days prior to the election—suggesting that markets have stomached a Sánchez-led, left-leaning government already. Notably, the reaction in bond markets was also somewhat positive in the aftermath of the election, with the Spanish-German bond spread tightening on 29 April. In short, with the economy in fairly good shape and fiscal imbalances gradually improving, coupled with the government’s stable credit rating, the heightened political uncertainty stemming from any protracted period of coalition negotiations is unlikely to meaningfully impact the near-term economic outlook.