Country Report Spain September 2009

Summary

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.
Although not the Economist Intelligence Unit's central forecast, there is a risk of the government falling, given its precarious position in parliament. The PSOE is seven seats short of a majority and not in any formal alliance.
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.
GDP is expected to contract by 3.8% in 2009 and by 0.9% in 2010, down from growth of 0.9% in 2008. The economy will remain weak up to end-2010.
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 over 12% of GDP in 2010. This will push the PSOE to seek some austerity measures and tax hikes.
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.

Media attention during the quiet mid-year recess centred mainly on the travails of the main opposition party, the centre-right Popular Party (PP), and the fallout from the judicial investigation into the so-called Gurtel Case.
Despite a flurry of terrorist attacks by the separatist Basque organisation Euskadi ta Askatasuna (ETA), timed to mark its 50th anniversary, the group remains severely debilitated.
The deterioration in the public finances shows no signs of moderating. Government tax revenue fell by 23.1% in the first six months of 2009, to ???65.7bn, testimony to the scale of the slump in economic activity.
In late August the influential minister of infrastructure and deputy leader of the PSOE, Jose Blanco, began to prepare the ground for an increase in tax rates later in 2009.
Although moderating, the economy remains in deep recession. Real GDP in the second quarter of 2009 contracted by 1.1% quarter on quarter and by 4.2% year on year, its deepest contraction since 1959.
The pace of job losses slowed in the second quarter, but much of this moderation can be attributed to the government's special local works programme, the ???11bn Plan E.

This report covers the following industry codes:
SIC Code: 60;37
NAICS Code: 52;336