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Spain Business Forecast Report Q2 2013

Spain Business Forecast Report Q2 2013 - new country guide report published

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2014-03-10 11:41:03 - Spain Business Forecast Report Q2 2013 - a new country guide report on

In light of the rapid worsening of financial conditions in Q412, we believe the EUR100bn bank rescue announced in June 2012 will mark the first of a number of bailouts for the Spanish economy over the next few years, and do not rule out Spain receiving a full-blown sovereign bailout in 2013 or 2014. With the continued deterioration of economic conditions in the eurozone, this underpins our bleak outlook for the Spanish economy for the next few years. All components of GDP by expenditure are set to suffer given the pressures facing the housing, banking, fiscal and external sectors of the economy. In light of the depression scenario we expect for the domestic economy over the next few quarters, we



expect the countrys current account deficit to continue narrowing over the medium term, as weak domestic demand strangles demand for imports.

While Spains trade balance is also benefiting from the increased competitiveness of Spanish merchandise exports, we caution that stagnant demand in Europe will prevent a more significant narrowing of the current account over a medium-term time horizon. We expect to see an uptick in political risk in 2013, as the embattled government of Prime Minister Mariano Rajoy faces increasing criticism over its handling of the economy and its continued commitment to fiscal austerity. With fiscal austerity unlikely to ease significantly, unemployment set to continue rising and a lost decade ahead for the domestic economy, we believe the Peoples Party will find it very difficult to arrest its decline in popularity. With recent media reports claiming that Rajoy and other leaders of his party received payments from a slush fund damaging his credibility even further, we believe the prospect of re-election for the party in 2015 is highly unlikely.

Key Risks To Outlook

The deteriorating economic picture in the wider eurozone presents a huge threat to the Spanish economy. We believe macroeconomic conditions could worsen from current levels if there is little progress on financial/banking integration, which would in turn prompt us to reassess Spains growth potential over the medium-term. We believe the governments commitment to fiscal austerity could present its own downside risks over the next few quarters, as the country could be forced to introduce even greater spending cuts and tax hikes over the next few years if it decides to agree a bailout with the EU. In the scenario, the governments fiscal position would be weakened even further, having already been hit by low tax revenues and increased social security payments over the past few years.

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Mike King
Phone: London: +44 (0) 203 086 8600

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