The Bank of Spain hiked its growth forecasts for the Spanish economy this year and next on Tuesday, though it warned in the wake of an inconclusive general election of potentially damaging uncertainty over reforms and budget policies.
The vote on Dec. 20 delivered a highly fragmented result, making it hard for any party to form a government and heralding weeks of tough negotiations as the center right People's Party (PP) seeks allies to stay in power.
The Bank of Spain said that potential headwinds for the economy included doubts over policy in Spain, as well as a potentially harsher-than-expected slowdown in emerging markets.
"Internally, the main source of uncertainty is associated with the evolution of economic policies, given how much the reform agenda and budget policies in particular affect confidence," the Bank of Spain said in a monthly report.
Spain's economy has recovered from a deep recession to become one of the fastest-growing in the euro zone this year, as high unemployment starts falling off, feeding a pick-up in household spending.
On a quarterly basis, the pace of growth slowed slightly in the July to September period, reaching 0.8 percent. The Bank of Spain said on Tuesday it expected the economy to expand by 0.8 percent once again in the fourth quarter.