Politics

Spain could remain in political limbo despite upcoming election

Key Points
  • Spain is set to grow at a rate of 1.9% this year and 1.5% in 2020.
  • Spain's unemployment rate stood at 15.3% in 2018 and is set to decrease to 13.9% this year. 
  • As many as 13 parties are expected to win seats in the Spanish Parliament, according to Eurasia Group.
Spanish Prime Minister Pedro Sanchez attends a debate on the government's 2019 budget during a parliament session in Madrid on February 13, 2019.
PIERRE-PHILIPPE MARCOU | AFP | Getty Images

Spain is unlikely to end seven months of political uncertainty with an upcoming election Sunday, analysts told CNBC.

Acting Prime Minister Pedro Sanchez won a general election in April but failed to build a parliamentary majority to back his government. After months of failed negotiations between Sanchez's Socialist Party and other political groups, the Spanish King called for a new vote to be held November 10.

"Based on current polls and seat projections, forming a government will in fact be more difficult after the next election," Maartje Wijffelaars, senior economist at RaboResearch told CNBC Monday.

The latest polls give 27% of support to Sanchez's Socialist Party, followed by the pro-business Partido Popular (PP) with 21% of votes. None of the two parties – which until recently dominated Spanish politics – are likely to have enough support to form a majority government.

During the election in April, Sanchez received 29% of the votes and the PP party got 17% of support.

"Whichever the ups and downs of this former hegemonic parties are, none will be able to govern alone. Agreements and consensus will be a must for whoever shall form the next executive in Spain," Juan Soto, executive director at the Spanish think tank Civismo.

As many as 13 parties are expected to win seats in the Spanish Parliament, according to Eurasia Group.

What are the most likely scenarios?

Analysts point to either a left-leaning government or a more right-wing leadership instead of the traditional divide between the Socialist Party and Partido Popular.

Eurasia Group outlined three main scenarios: 1) Sanchez is likely to lead the next government, backed by other left-wing parties and moderate Catalan separatists; 2) Sanchez leads a minority government with the support of right-wing parties, including the liberal Ciudadanos and the pro-business PP; 3) or there's "an extended gridlock likely ushering in a third consecutive election."

For now, economic growth will continue to outpace the euro zone average, but growth is slowing, and Spain is not immune for the slowdown elsewhere in the world.
Maartje Wijffelaars
Senior economist at RaboResearch

In the aftermath of the April election, Sanchez tried to reach an agreement with the left-leaning Podemos (a party that emerged in the wake of the sovereign debt crisis). However, Sanchez did not want Podemos in government and the later did not want to back the Socialist Party from the outside.

"Socialist Prime Minister Pedro Sanchez's gamble that PSOE (Socialist Party) would benefit from a second election has not paid off," Federico Santi, analyst at Eurasia Group said in a note last week.

"Left-wing parties collectively will very likely fall short of a majority again, forcing PSOE to look to the left-leaning Catalan separatist Republican Left for support. Bringing together such a diverse array of parties will be very challenging," Santi added.

What does further political uncertainty mean for Spain?

Analysts have told CNBC that Spain is unlikely to see any significant reforms and could be ill prepared for the next economic downturn.

"We are unlikely to see the necessary economic and fiscal reforms to better prepare the economy for the next economic downturn and rapidly ageing population," Wijffelaars from RaboResearch told CNBC via email. She cited that Spain is still struggling with high unemployment rates, large discrepancies in the labor market and a high-level of public debt.

"For now, economic growth will continue to outpace the euro zone average, but growth is slowing, and Spain is not immune for the slowdown elsewhere in the world," she said.

Spain is set to grow at a rate of 1.9% this year and 1.5% in 2020. Spain's unemployment rate stood at 15.3% in 2018 and is set to decrease to 13.9% this year. This is according to forecasts from the European Commission out Thursday.

Spain main index is up by 3% from a year ago.

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