Download Spanish growth remains strong ahead of PSOE primaries for party

GI Research Market Commentary
Spanish growth remains strong ahead of PSOE primaries for party leadership
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On Friday last week, Spain’s real GDP growth surprised again on the upside (+0.8% qoq, + 3.0%
yoy), defying our expectation of a mild deceleration driven by weaker consumer spending.
While retail sales contracted in qoq terms for the first time since Q4 2013 due to the spike in
headline inflation (+2.7 yoy in Q1), resilient confidence indicators and strong job creation (+3.5%
yoy) led to the reacceleration in activity.
We still expect a moderation of growth in the coming quarters, as fiscal policy will move in a
slightly restrictive territory in 2017 (structural primary balance to improve by 0.1% of GDP) after
the 2.7 pp cumulative stimulus in 2015-2016.
In the near-term, politics remains the main source of risk. The Socialist party (PSOE) will hold the
primaries to elect a new party leader on May 21. A victory of the former secretary Pedro Sánchez
could result in a stiffer PSOE’s stance against PM Rajoy’s minority government.
That said, even if Mr. Sánchez prevails, we deem the risk of early elections in the short-term as
contained as center-right forces (PP and Ciudadanos) would strengthen their position over the
PSOE and the left-wing Unidos Podemos.
Last Friday, preliminary figures showed a reacceleration in real GDP growth in Spain. Economic activity
expanded by 0.8% qoq, slightly above the consensus (+0.7%) and our own estimates (+0.6% qoq). Spanish
growth is likely to have exceeded euro area’s one for the 14-th quarter in a row. While a breakdown of
the contribution to overall growth is not yet available, we believe stronger private investment and inventories
build-up to have played a role, offsetting the likely slowdown in consumer spending. In more general terms,
economic activity is likely to have benefitted from the resilience in confidence indicators (at the highest level
since December 2015) and the strong momentum in the labor market (registered employment up by 3.5%
yoy and unemployment rate down to 18.0% in February, the lowest level since June 2009).
Our below-consensus forecast was based on the expectation of a stronger negative impact from
cooling retail sales in Q1 2017, a good proxy for the overall consumer spending tracked in GDP statistics.
Retail sales declined by 0.7% qoq in real terms, the first contraction since Q4 2013. This reflects the spike in
headline inflation, which increased by 2.7% yoy in the first quarter, a significant acceleration when
compared to the -0.3% average rate registered in 2016. Spain is the euro area country most exposed to
rising energy prices amid the larger weight in the HICP basket and the low level of fuel excise.
Given the stronger-than-expected Q1 printing, we revised our 2017 real GDP growth estimates to +2.6%
from +2.3% before. That said, we still expect a moderation in real GDP growth in the coming quarters
due to rising inflationary pressures and the negative impact on real disposable income, but also due to the
projected reduction in fiscal policy’s support. After the large fiscal stimulus that prevailed over the last
two years (the structural primary balance deteriorated by 2.7 pp of GDP in 2015 and 2016), Spain is
expected to switch to a mildly restrictive stance this year (expected fiscal impulse between -0.1 and -0.5
pp in GDP terms) in order to get close to the budget target set by the European Commission (headline deficit
at 3.1% of GDP compared to 4.5% at end-2016). Budget implementation data show a mild reduction in
central government’s deficit in the first three months of 2017 (down to € 5.7 bn compared to € 10.1 bn in
2016).
Given the strong economic performance – which was a key rationale supporting S&P’s decision to raise
Spain’s outlook to positive from stable on March 31 – and the benign funding conditions, we see politics as
the main source of risk in the near-term. PM Rajoy’s minority government has so far faced no major
existential crisis despite ongoing corruption scandals. As an example, last Thursday the left-wing Unidos
Podemos called for a censure motion against PM Rajoy, but failed to secure the support of other opposition
parties, including the Socialists (PSOE).
The relatively relaxed attitude of the PSOE towards PM Rajoy’s cabinet could, however, change
depending on the result of the party primaries on May 21. A victory by the former secretary Pedro
Sánchez – who was forced to resign by his own party fellows in October 2016 – could result in a stiffer
PSOE’s stance, making governability more and more difficult. Opinion polls show that Mr. Sánchez is the
leading candidate (with around 40% of voting intentions), but a possible withdrawal by Patxi López
could eventually favor the current President of Andalusia, Ms. Susana Díaz. The latter is seen closer
to People’s Party (PP) positions and was among the key supporters of the abstention of the PSOE in the
investiture vote in October 2016, the step that cleared the way to the formation of the current PP-led minority
government.
Even if Mr. Sánchez prevails, we deem the risk of early elections in the short-term as contained.
Indeed, the PP is still leading in voting intentions with a double-digit margin over the PSOE (32.9% vs
21.7% according to the average of the most 5 recent polls). Moreover, the left-wing Unidos Podemos, a
difficult but necessary ally for the PSOE to form a majority government, seems to have lost some support,
with the centrist Ciudadanos rising to 14.5% from the 13.1% secured at the last general elections in June
2016. Given the current opinion polls, an early vote could even result in a majority government led by
the PP and Ciudadanos, an outcome which would lead to a severe loss of influence for the PSOE.
Author:
Luca Colussa, CFA
Macro Analyst
[email protected]