Spain faces a decisive second semester for the economy, marked by uncertainty and political instability

Spain goes on vacation without the certainty of whether there will be a stable government when it wakes up from its rest in September. And if there is a time when stability is important for economic policy, it is undoubtedly the second half of 2023.. Firstly, because the country has to start preparing for the return of fiscal rules in 2024. Brussels has already put homework: a budget adjustment of 9,000 million if Spain does not want to expose itself to sanctions. And, secondly, because the economy is facing a scenario of uncertainty in which the growth engines are beginning to show signs of exhaustion.

The second half of the year is always important at an economic level, but this time it is even more so, given the circumstances. The return of summer is when preparations begin to prepare the General State Budget (PGE). The public accounts have to be ready before September 30 to send them to Brussels in October and then the Commission for its approval in November.

However, this year the budget cycle will be conditioned by the parliamentarian. The calendar suggests that there will not be a new Executive until the first week of September at the earliest and the process could easily be extended until November. If there is no success, the elections will have to be repeated and the new Executive would hardly take the controls before 2024.

The results of the elections do not anticipate that the investiture will be resolved quickly. The block on the right does not add up and has the declared opposition of the rest of the parliamentary arch. While the one on the left would need, in principle, the support of ERC, Bildu, PNV, BNG and the abstention of Junts. Something that is by no means guaranteed.

In this situation, if there are no Budgets, the 2023 public accounts will be automatically extended next year, although the Executive has the possibility of approving new budgets to replace those extended later. The problem is that the accounts currently in force are designed for a scenario without fiscal rules with a forecast deficit of 3.9%.

Spain has committed to Brussels to reduce the imbalance in the accounts to 3% in 2024, which would imply an adjustment of at least 9,000 million euros. In principle, if the European Commission's recommendation to withdraw support measures to alleviate energy prices is complied with, it would be enough to cover most of the adjustment.. It should be remembered that if Spain fails to meet its deficit targets, it is exposed to sanctions from Brussels. A penalty that, beyond economics, is worrying about the reputational effects it entails.

And it is that the question is not only to convince the European Commission that Spain is capable of balancing the accounts, it is also necessary to persuade the markets. With an ECB in retreat, the country is more exposed to investors wanting to buy Spanish public debt securities, although for the moment Spain is not having problems placing its debt.

towards the slowdown

The macroeconomic outlook for the second semester is also uncertain. All the omens point to the fact that political instability will overlap with a slowdown in the economy that is already beginning to be perceived in various indicators.. Without going any further, economic growth in the second quarter slowed to 0.4% with a drop in exports greater than expected. Along the same lines, the Social Security affiliation data for June already reflected a slowdown in job creation, with the lowest figure in eight years for this month.

The outlook for the next two quarters is marked by uncertainty. In Europe, the context is one of economic stagnation, with the German engine seized up in an environment in which the strong rises in interest rates by the ECB will continue to reduce growth. As the year progresses, interest rate hikes will continue to unfold their effects and further cool the economy.

The Euribor will continue to make a dent in the pockets of the around four million homes mortgaged at a variable rate. Funcas forecasts suggest that loan installments will continue to become more expensive at least until May 2024. In this context of historically high interest rates, financial tensions like those experienced in March with the bankruptcy of Silicon Valley Bank and Credit Suisse could reappear.

The great hope is the evolution of consumption. With exports declining due to weakness in Europe, household spending could be the lifeline of the national economy in the coming months. The drop in inflation, added to the improvement in wages, will allow families to recover part of the purchasing power lost during the crisis. The strong job creation that has occurred in the last year may also contribute to consumption.

Another of the key variables will be the rate of execution of the European recovery funds, which has slowed down considerably in the first half of the year. Between January and June 2023, only 7,700 million euros have been committed, an amount less than that of the two previous years at this point (20,620 million in 2021 and 12,856 million in 2022).. Spain has yet to request the fourth and fifth disbursements – endowed with 10,000 and 7,000 million respectively – which must be requested before the end of 2023.

Even with everything, the economic growth achieved to date will clearly be enough to guarantee that Spain closes 2023 as the major European economy with the greatest growth in GDP in 2023.. Even if the national GDP freezes in the two remaining quarters of the year, growth will be at least 2% due to the carryover effect from the end of last year.