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Facing another election, Spanish economy feels effects of the stalemate

The new government that emerges after the Sunday vote will have to deal with an impending slowdown and introduce much-needed reforms after years of political paralysis

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Álvaro Herrero, a manager at a Santander-based SME.

The government that emerges from Spain’s parliamentary election on Sunday – if one is formed at all – will have an increasingly complicated situation to deal with on many fronts, including the economic one.

With the economy giving signs that the end of a cycle is near, the latest survey by the Family Business Institute shows that 16% of entrepreneurs are planning to reduce their staff, compared with seven percent in 2018. And while 80% of respondents were thinking of making investments last year, this figure has now dropped to 73%.

Spain has the EU’s second-highest jobless rate, and a public debt close to 100% of GDP

Meanwhile, the International Monetary Fund (IMF) is forecasting slower global growth due to trade tensions and other risks to the world economy. In Europe, heavyweights like Germany and Italy are on the brink of a recession, although Rafael Doménech, of BBVA Research, says that despite a summer filled with bad news, things seem to have calmed down.

For now at least, the Spanish economy is proving surprisingly resilient. Despite the prolonged political deadlock, output continues to grow above the European average: household consumption, investment and government spending are fueling growth rates of 2%.

But it seems inevitable that Spain will eventually suffer from the same symptoms as its neighbors, and they will be compounded by domestic weak points such as having the EU’s second-highest jobless rate, and a public debt close to 100% of GDP.

Despite the prolonged political deadlock, output continues to grow above the European average

A new crisis would find Spain unprepared to deal with the consequences: the public accounts leave little margin for stimulating growth through fiscal policy, and monetary policy cannot do much more than it already has: the European Central Bank has practically used up its arsenal of tools.

The last labor force survey in Spain, the EPA, shows that the unemployment rate has dropped below 14% for the first time in a decade, but that job creation in the third quarter was the slowest since 2012, when Spain was in a recession.

The tech revolution

María Jesús Fernández, a senior economist at the think tank Funcas, rejects any worst-case scenarios. “We’d been expecting a soft slowdown for a long time, and that’s what the figures are showing,” she says.

The challenges she sees ahead for the next government of Spain are, “in the short run, dealing with the slowdown without significantly damaging the public accounts. And in the long run, preparing Spain for the technology revolution that is already underway. We are not prepared for it, and no measures are being taken. Some decisions are even headed in the opposite direction.”

Doménech of BBVA Research underscores the lost opportunities for introducing reforms as a result of the political deadlock, which is blocking progress on important issues such as regional funding, pensions, the labor market and education. This expert estimates that the stalemate has cost the Spanish economy between 150,000 and 200,000 jobs in the last four years, which have seen Spaniards go to the polls in national elections three times already, with a fourth one coming up this Sunday.

“We need training plans. And there is no global strategy for the auto sector,” says Álvaro Herrero, a top manager at a Santander-based SME that makes metal parts for automobiles. This company has dropped its plans to hire more personnel after sales forecasts were sharply reduced from last year. “We need a government that sends out clear signals.”

English version by Susana Urra.

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