Country Report Spain August 2012

Country Report Spain August 2012

Outlook for 2012-16

• The Popular Party (PP) won an absolute majority at the general election on November 20th 2011 and is expected to remain in office until the end of the parliamentary term in late 2015.
• The government's main focus will be to improve the public finances, to implement structural reforms, notably in the labour market, and to restructure Spain's financial sector.
• The euro zone crisis will continue to weigh on investor and business sentiment, hampering efforts to improve competitiveness and productivity. The Economist Intelligence Unit believes that the risk of a euro zone break-up remains high.
• We expect that the government budget deficit will narrow only gradually from an estimated 8.9% of GDP in 2011 to still above 3% of GDP by 2016, with the government missing by some distance its target of 3% of GDP by 2014.
• The situation of the Spanish banking sector forced the country to access emergency financial support from its euro zone partners, which under the agreement would amount to up to EUR100bn.
• The European summit in June 2012 acknowledged the need for these funds to be channelled directly into the banks, on the condition that a European banking supervisory structure is created, which could prove difficult.
• Funding problems in the regions have been negatively received by financial markets, pushing yields to unsustainable levels. Although not our central forecast, the risk of a full sovereign bail-out has increased substantially.
• The economy fell into recession in late 2011 and is expected to experience a severe contraction in 2012 and a small contraction in 2013. For 2014-16, we forecast an average annual real GDP growth of about 1.2%.

Review

• In response to the Eurogroup meeting that gave Spain more time to reduce its deficit and laid out more details regarding the bail-out of Spanish banks, the government announced its fourth austerity package since taking office.
• The government expects to reduce net spending by EUR65bn over the next two and a half years, mainly via a 3-percentage-point increase in the value-added tax (VAT) rate. We do not expect this package to deliver the expected results.
• Inflation (according to the EU harmonised measure) averaged 1.9% in the first half of 2012, and the VAT hike is expected to push it slightly higher in the second half, so that the average of the year should stand at 2%.
• The trade balance improved significantly in May, partly as a result of a fall in imports but mainly because of a significant rise in merchandise exports.

Please Note: Due to the Nature of This Report The Toc is Not Available