Economists See Spain's Growth Ebbing Under PSOE-Podemos Pact

  • Growth may slow more under progressive pact than conservatives
  • GDP may slip to 0.7 percent in 1Q and 0.5 percent in 2Q

The Spanish economy’s momentum would hit a speed bump if the progressive alliance between the Socialists and Podemos succeeds in ousting the incumbent People’s Party from office.

That’s the verdict of economists surveyed by Bloomberg News, who expect growth to slow to 0.5 percent in the second quarter if the Socialists, also known as the PSOE, are governing alongside Podemos, compared to an expansion of 0.6 percent under the PP. Either way, that would be the slowest pace of expansion since the third quarter of 2014 as external tailwinds fade.

“I don’t think GDP would be hit immediately by an adverse government coalition between Podemos and the Socialists, but it could hurt investment,” said Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics.

Gross domestic product will expand by 0.7 percent in the first quarter, according to the median estimate in the poll conducted between Jan. 18 and Jan. 20. That’s unchanged from a previous survey carried out before the Dec. 20 election. Output expanded 0.8 percent in the last three months of 2015, according to the Bank of Spain. The Spanish National Statistics Institute is due to release official figures Jan. 29. The economy peaked in the second quarter of 2015 when it expanded 1 percent, the fastest pace in eight years.

Potential Alliances

A month after an inconclusive election, which saw Acting Prime Minister Mariano Rajoy lose his majority in parliament, the lines are beginning to clear. Rajoy rejected the King’s invitation last week to form a government after admitting he doesn’t have enough support, putting the spotlight on the Socialist party.

Having repeatedly said they would not join a grand coalition with 60-year-old Rajoy, the Socialists are now faced with a dilemma: accept an offer from Podemos with strings attached or risk new elections in the spring.

In exchange for his support, Podemos’s leader Pablo Iglesias is seeking the post of deputy prime minister as well as multiple cabinet posts should Socialist leader Pedro Sanchez form a government. If the Socialists refuse the offer, Podemos counters it would show that the Socialists do not truly favor change.

Simultaneously, Rajoy will hold talks with Albert Rivera, head of the liberal group Ciudadanos, to explore possible alternatives for forming a government. The two parties have a combined 163 seats in the lower house, 13 short of a majority, so they’d need the support or the abstention of other parties.

While the short-term growth outlook remains broadly unchanged, economists do see some threats from the inconclusive electoral outcome. The risk premium on Spanish government bonds and foreign investment in the country would be most likely to increase according to 80 percent and 73 percent of the 15 respondents to the survey, respectively. Forty percent expected a hit to consumer confidence and hiring, while only 27 percent see decreased consumption, which has so far been supporting growth.

Acting Economy Minister Luis de Guindos took a swipe at a Socialist-Podemos coalition during a Bloomberg TV interview from Davos this weekend, arguing that a government deemed as “having too much influence from Podemos” would have a detrimental impact from a market perspective, and insisting that negotiations are far from over.

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