Spain’s Economy on Shakier Ground

Spain’s economy kept up a steady expansion in the fourth quarter to hit one of the eurozone’s fastest growth rates for 2016, but its consumer-led recovery may slow in the coming months amid rising inflation at home and political tensions abroad. 

Quarterly growth of 0.7% was on a par with the previous three months, the National Statistics Institute said in a preliminary reading on Monday, Reuters reported. 

Growth of 3.2% in 2016 as a whole also matched the 2015 figure, marking a third year in a row of a strong recovery from recession despite a 10-month hiatus between governments as party leaders bickered following inconclusive elections. 

The economy’s momentum will be key for Prime Minister Mariano Rajoy as his minority government tries to trim the public deficit this year without resorting to big spending cuts which opposition parties may not support. 

But growth is expected to start slowing in 2017 as strengthening oil prices cause inflation to jump, limiting families’ purchasing power after weak consumer prices helped extend a rebound in household spending. 

The pace of job creation is also expected to slow, and the effect of other factors that have stimulated the economy, including tax cuts from 2015, is fading, economists say. 

Further afield, Britain’s vote to leave the European Union and Donald Trump’s election as US president have fuelled a mood of political uncertainty. 

Spain is expected to grow 2.5% in 2017, the government forecast in December. It believes this will help it shrink the deficit to a target of 3.1% of output agreed with Brussels from a projected 4.6% in 2016 without further measures beyond a package of levies on tobacco and sugared drinks and changes to corporate taxes announced last year.

While quarter-on-quarter growth remained steady between October and December in Spain, INE said that on an annual basis the pace of expansion slowed from 3.2% in the third quarter to 3% in the fourth. 

 Unemployment Still High

Unemployment fell to a seven-year low in the fourth quarter in a boost for Rajoy who has made job creation the centerpiece of his administration. Even so, the pace of job creation was down compared to the previous year, suggesting a moderation of the recovery, which has predominantly been driven by households over the past year, Bloomberg reported.

In 2012, Europe’s fifth largest economy shrank by 2.9% as the banking sector neared collapse. In 2014 the economy returned to growth, which has been steady at 3.2% for the last two years.

However, the Spanish economy still bears deep scars from the crisis, with unemployment still above 18% (although at levels lower than those seen since 2009).

The youth unemployment rate has risen over the last year, despite a growing economy, to stand at 44.4%, the highest of the eurozone’s major economies.

 Struggle on Approving Budget

The latest health check on the Spanish economy comes as the government struggles to approve a budget for 2017 in a highly fragmented parliament. After losing his parliamentary majority, Rajoy now needs a cross-party agreement to get the bill approved. Earlier this month, Budget Minister Cristobal Montoro said the government will only present the plan once an accord is reached to stop it from being voted down in parliament.

The European Commission, which oversees the national budgets of each member state, said Spain’s draft proposal is broadly in line with the region’s fiscal rules, while it predicted a small deficit miss and warned some adjustments might be necessary. 

The plan includes a series of fiscal measures, mostly aimed at the corporate sector, designed to prop up tax revenue. The government has ruled out an increase in sales tax or income tax.

While the Spanish economy has shown resilience in the face of political uncertainty, outperforming its main euro peers, most economists expect a slowdown this year as temporary tailwinds and the impact of reforms fade.