Country Report Spain October 2009

Outlook for 2010-11

• The continuing economic downturn and the need for fiscal austerity measures are likely to reduce support for the governing Spanish Socialist Workers' Party (PSOE).
• There is a risk of the government falling, given its precarious position in parliament. The PSOE is seven seats short of a majority and is not in any formal alliance.
• The economy is expected to begin to return to growth during 2010, yet GDP will show a contraction of 0.8% (after an estimated decline of 3.8% in 2009). Annual real GDP will return to positive growth in 2011, but of just 0.7%.
• The general government budget deficit is forecast to worsen from an estimated 10.8% of GDP in 2009 to 11.9% in 2010. Despite a forecast austere budget for 2011, the deficit will fall only slightly in that year, to 10.6% of GDP.
• High and still-rising unemployment means that social unrest cannot be ruled out and that tensions associated with a large influx of immigrants in recent years (over 5m in the last decade) are likely to intensify.
• There is a risk that an inevitable restructuring and consolidation in the savings banks sector could be insufficient and would require more government intervention, adding to public debt and decreasing credit flows.

Monthly review

• Despite tentative signs that the economy may be bottoming out, the PSOE prime minister, Jose Luis Rodriguez Zapatero, has begun to cut an increasingly isolated figure.
• The Catalan nationalist group, Convergence and Union (CiU), believes that Mr Zapatero may be considering an early general election in the second half of 2010, to coincide with regional elections in Catalonia.
• The government presented its draft 2010 budget in September. It contains a series of tax increases that would raise ???11bn in extra tax revenue (around 1% of GDP). The budget also calls for a cut in central government spending of 3.9%.
• The government's tax increases met with considerable media and political opposition, but the budget is likely to pass in parliament.
• Most economic data continue to paint a picture of rising business and consumer confidence (albeit from extremely low levels) and tentative, but by no means conclusive, signs of stabilising economic activity.
• Industrial production fell by over 20% year on year in the first five months of the year, but the pace of decline then moderated to a seasonally adjusted -14.3% in June, to -17.1% in July and to -11% in August.