Country Report Spain March 2009

Outlook for 2009-10

• Popular disgruntlement with the governing Spanish Socialist Workers' Party (PSOE) is likely to grow, and the government will find it hard to retain the same level of public support that it had at the time of the last general election.
• The risk of the government falling remains low, but its ability to pass legislation could be severely impaired, given that it is seven seats short of an absolute majority and not in any formal alliance with another party.
• Economic policy will focus on stemming the recession, but there may also be a possible easing of resistance to foreign takeovers of national champions.
• Rapidly rising unemployment means that social unrest cannot be ruled out and that tensions associated with a large influx of immigrants in recent years (over 4m in the last decade) are likely to intensify.
• GDP is expected to contract by 3.3% in 2009 and 0.7% in 2010, down from growth of 1.2% in 2008. A modest recovery only will begin during the second half of 2010, and there is a possibility that this will be delayed.
• Increased spending and falling tax revenue will lead to a significant rise in the fiscal deficit, from an estimated 3.8% of GDP in 2008 to 9.2% in 2009 and 9.9% in 2010, likely leading the accounts into a state of crisis.

Monthly review

• The Basque Country regional elections in March produced a landmark result, with regional nationalist parties failing to secure a parliamentary majority for the first time since the restoration of regional democratic elections in 1980.
• Following the discovery of an extraordinary internal spying controversy in January, the Popular Party (PP) has become embroiled in a potentially more damaging judicial investigation into irregular financial activities.
• In early February the prime minister announced the first, albeit small, cut in public spending since the onset of the credit crisis, suggesting that budgetary strains are beginning to restrict the governments room for fiscal manoeuvre.
• The financial and property crisis claimed its first banking victim in February, with the government-approved merger? of the troubled Caja Castilla-La Mancha savings bank with the larger Unicaja.
• Real GDP contracted by a seasonally adjusted 1% quarter on quarter in the fourth quarter of 2008 (0.7% year on year), as private consumption, fixed investment, exports and imports all dropped off significantly.
• The slump in domestic demand is beginning to underpin a correction of Spains current-account deficit, but financing this deficit in the present circumstances remains a major challenge.