Spain’s robust economic expansion is defying concerns that a political impasse, now in its ninth month with no end in sight, would tarnish one of Europe’s economic bright spots.
But the pillars that have sustained Spain’s recovery from recession are showing signs of strain, and economists expect growth to slow in 2017—in part because political uncertainty is putting a damper on some kinds of investment.
The Spanish economy grew 0.8% in the second quarter driven by consumer spending and exports, the country’s statistics agency said Thursday. The uptick is in line with first-quarter growth and better than the 0.7% the agency had predicted in July.
The eurozone’s fourth-largest economy is on track to expand around 3% this year, outpacing the International Monetary Fund’s projections for France, Germany and the U.S.
Spain has been without a full-fledged government since December. Doubts about who will form the next one have persisted since the divided parliament elected that month failed to install a prime minister and was dissolved. A new parliament, elected in June, is also deadlocked among four major parties, none close to a majority.
Mariano Rajoy, the conservative leader who was elected during the recession in 2011 and has overseen three years of recovery, remains in office as acting prime minister but with no power to propose legislation or spend on new projects. Parliament next week is expected to reject his bid for a second term, as head of a minority government, creating the possibility of yet another general election.
Despite the uncertainty, Spaniards are spending more this year than last, buoyed by growth in jobs and wages. A global drop in oil prices has left the country’s consumers with some extra cash. Negative interest rates have pushed down the monthly cost of many borrowers’ mortgages in Spain, where the majority of home loans are variable-rate, meaning they fluctuate with changes in benchmark rates.
Yields on government bonds have fallen to less than 1% as investors remain optimistic about Spain’s economy and the European Central Bank buys sovereign debt to try to boost growth and lift inflation in the region.
Parliament passed a 2016 budget that locked in government spending before last December’s inconclusive election.
“Spain is on autopilot from the fiscal standpoint,” said Daniele Antonucci, a Morgan Stanley economist.
The political stalemate has begun to take a toll on the economy: It chugs along, economists say, but could be growing even faster with a government in place.
Miguel Cardoso, chief Spain economist at lender Banco Bilbao Vizcaya Argentaria SA, said the economy probably would be expanding by 3.5% in 2016 were it not for political uncertainty. Some individuals and businesses are paring back purchases and delaying or canceling planned investments, he said.
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