Spain growth forecasts hiked, vote uncertainty looms

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.

Spanish Prime Minister Mariano Rajoy
Denis Doyle | Getty Images
Spanish Prime Minister Mariano Rajoy

It also raised its annual growth forecast for 2015 to 3.2 percent from 3.1 percent, and for 2016 to 2.8 percent from 2.7 percent. Official preliminary data is due on Jan. 29.

"The slight slowdown observed in the second half of the year ... does not alter the central scenario of sustained growth in gross domestic product in the coming quarters," the Bank of Spain said.

Prime Minister Mariano Rajoy's PP had pinned its hopes of securing another term in office on the economic rebound, but it has also been hit hard by corruption scandals and many Spaniards are still worse off than they were before the downturn.

The PP imposed deep spending cuts at the height of the recession and pushed through a labour reform that makes it easier for companies to fire staff - policies that were praised by some economists and European Union partners but which have been unpopular with voters.

Rajoy's party fell far short of a majority in parliament, and left-wing opponents have already signaled they will not support a government led by the party.

An alliance of left-wing parties, including anti-austerity newcomer Podemos ("We Can"), is another option, but even by clubbing together they may still struggle to reach a sufficient number of seats or form a stable government.

Ratings agency Moody's said the political uncertainty could put the brakes on a long-awaited rating upgrade.

Reflecting the concerns of foreign investors, Markus Kerber, director-general of the BDI Federation of German Industries, urged Spain's new government to "stay the course" on economic policy.

The close result magnifies the importance of small separatist parties from Catalonia, which could try to extract concessions such as the promise of an independence referendum as the price for their support.

Also at stake is whether Spain continues to follow the belt-tightening measures to cut its budget deficit that the PP credits for helping end the recession.

Both Podemos and the Socialists have pledged to slow the pace of deficit-cutting if they gain power.