Country Report Spain July 2008

Outlook for 2008-09

• The governing Spanish Socialist Workers' Party (PSOE) secured a narrow, but relatively comfortable victory in the March 9th general election, winning a second four-year term in office.
• The PSOE increased its share of the vote since the previous election in 2004, falling seven seats short of an absolute majority. So far, it has not sought a formal governing alliance, and it may now find this hard to do.
• The consequences of a sharp economic slowdown, including rising unemployment and a contracting housebuilding sector, will be the most immediate challenge and a potential source of political instability.
• The combination of increased spending, tax cuts and an economic slowdown is likely to lead to a fiscal deficit of 1.1% of GDP in 2008 and 1.7% in 2009, compared with an estimated government surplus of 0.6% in 2007.
• The Economist Intelligence Unit forecasts that slowing domestic demand, including falling private consumption and gross fixed investment, will reduce GDP growth from 3.8% in 2007 to 2.3% in 2008 and 0.7% in 2009.
• Annual inflation hit a 13-year high of 4.6% in May. Despite high wage increases, it should ease towards the end of 2008 as consumer demand slows, but will remain above the euro area average.

Monthly review

• The PSOE is looking increasingly politically isolated and is struggling to adapt to a more difficult economic and social climate.
• Following the congress of the centre-right Popular Party (PP), Mariano Rajoy seems to have re-established his hold as leader, winning a mandate to reposition the party towards the political centre with regards to devolution.
• The minister of the economy, Pedro Solbes, presented draft guidelines for the 2009 budget, with what seem to be overly optimistic projections predicated on only a mild cyclical slowdown.
• In early June the minister of housing, Beatriz Corredor, announced the soon-to-be-presented housing plan for 2009-12, which will include measures to mitigate the downturn in the housebuilding sector.
• The government has approved an average rise in electricity tariffs of 5.6% in July, well below the National Energy Commission's recommendation.
• In May the consumer confidence index slumped to a 13-year low of -31, while the indices for both industry and construction fell to -14.
• Following a poor first quarter, registered unemployment rose by 15,058 in May, the biggest rise in this month since 1979.