Country Report Spain September 2008

Summary

At the March 9th general election the governing Spanish Socialist Workers' Party (PSOE) secured a clear win, but fell seven seats short of an absolute majority, which is likely to reduce its ability to pass legislation.
The PSOE may regret its decision not to seek a formal governing alliance with any of the small, mainly regional parties, as the latter now seem likely to distance themselves from a government mired in economic problems.
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 1.6% of GDP in 2008 and 2.6% in 2009, compared with a government surplus of 2.2% in 2007.
Slowing domestic demand, including falling gross fixed investment and weak private consumption, will reduce GDP growth from 3.7% in 2007 to 0.9% in 2008 and will cause GDP to decline by -0.6% in 2009.
Annual inflation fell to an estimated 4.9% in August from 5.3% in July. It should continue to ease towards the end of 2008 and into 2009, assuming a weakening of energy price pressures and slowing consumer demand.

On August 14th the prime minister, Jose Luis Rodriguez Zapatero (PSOE), convoked an unscheduled cabinet meeting to approve a series of measures to counter the economic downturn.
Tensions between the government and the Catalan regional parties have recently increased because of their failure to agree on a financing mechanism, and the government's insistence that it must be agreed with all other regions.
To slow the deterioration in the public finances, the minister of economics, Pedro Solbes, plans to sanction a public-sector pay rise of just 2% in 2009.
Second-quarter GDP figures were better than expected: real GDP growth remained positive, rising by 0.1% quarter on quarter (from 0.3% in the first quarter), and by 1.8% on an annual basis.
The initial slump in construction activity has now spread quite dramatically to industrial production, which fell by 5.8% year on year in May and by 9% in June, its biggest fall in 15 years.
In the second quarter of 2008 some 139,500 jobs were lost, quarter on quarter (seasonally adjusted). The unemployment rate jumped to 10.6%, and the government now forecasts a further rise to 12.5% in 2009.

Source: Country Report