Country Report Spain May 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 has risen, particularly given its precarious position since regional elections in March. It is seven seats short of an absolute majority and not in any formal alliance.
• 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 4.1% in 2009 and 1.1% in 2010, down from growth of 1.2% in 2008. A modest recovery is forecast to begin during the second half of 2010, although there is a possibility that this will be delayed.
• Increased spending and falling tax revenue will lead to a rapid rise in the fiscal deficit, from an estimated 3.8% of GDP in 2008 to 9.6% of GDP in 2009 and 10.2% of GDP in 2010, leading the accounts into a state of crisis.

Monthly review

• On April 7th the prime minister, Jose Luis Rodriguez Zapatero, announced a far-reaching cabinet reshuffle, aimed at re-establishing a clearer sense of strategic direction for the PSOE and stemming the incipient slide in its popularity.
• Should the latest opinion polls hold true, a victory for the opposition Popular Party (PP) in the June European Parliament elections would help consolidate the position of the party leader, Mariano Rajoy, and quell internal divisions.
• Aprils cabinet reshuffle, with the arrival of Elena Salgado and departure of the veteran and orthodox Pedro Solbes as minister of the economy, may open the door to important changes in economic policy.
• Just a week after the cabinet reshuffle, the governor of the Bank of Spain (the central bank) criticised government economic policy. Relations between the government and the central bank look set to deteriorate.
• The PP has outlined its own economic proposals, which include a public-sector austerity plan, a tax reform plan and a reduction in social security contribution rates for the self-employed.
• Unemployment reached 16.7% in the first quarter, up from 9.3% a year ago. The shake-out in the labour market is partly attributable to the countrys inflexible collective bargaining system.