Spanish Growth Slows as Inflation Unexpectedly Speeds Up

Spanish growth slowed slightly in the second quarter and inflation unexpectedly picked up in July as the economy faces months of uncertainty while the country’s main political parties battle to form a government after Sunday’s tightly contested election.

(Bloomberg) — Spanish growth slowed slightly in the second quarter and inflation unexpectedly picked up in July as the economy faces months of uncertainty while the country’s main political parties battle to form a government after Sunday’s tightly contested election.

Quarterly output rose 0.4%, supported by rising household demand, according to data from national statistics institute INE released on Friday. That’s in line with the median forecast of economists surveyed by Bloomberg and down from a revised 0.5% increase in gross domestic product in the previous three months.

Consumer prices rose 2.1% in July from a year earlier, accelerating for the first time in three months, according to the institute. The pace of inflation was predicted to remain unchanged at 1.6%, the median forecast in a Bloomberg survey showed.

The rate of underlying inflation excluding energy and fresh food items unexpectedly accelerated for the first time in five months to 6.2%. Economists had anticipated a slight easing to 5.7%.

“Domestic demand has gained strength, mostly due to a pick up in household consumption that reflects the good performance of the labor market,” said Santiago Lago Penas, an economics professor at Vigo University. Spain’s jobless rate dropped to 11.6% in the second quarter, its lowest in 15 years.

He said the pace of inflation will continue to accelerate in the coming months due to year-earlier comparisons and will likely end the year at around 3.5%. This would still be one of the lowest rates in Europe after Spain became the first euro-zone country to dip below the European Central Bank’s 2% target last month.

ECB President Christine Lagarde unveiled a ninth straight increase in interest rates on Thursday and said officials have an open mind on what to do next to tame consumer-price rises in the currency bloc.

What Bloomberg Economics Says…

“We expect base effects to start pushing the CPI measure up in coming months, while the European Central Bank’s restrictive monetary policy will probably weigh more markedly on activity over the second half of the year”

—Ana Andrade, economist. Click here for full REACT

Socialist Prime Minister Pedro Sanchez has struggled to capitalize on the resilience of Spain’s economy after Spaniards saw one of the sharpest drops in real income in the region.

His party finished second in Sunday’s ballot but did better than expected due to concerns about the far-right, and he’s now trying to stitch together enough support among smaller parties to stay in power. He is seen as having an edge in negotiations over conservative opponent Alberto Nunez Feijoo.

If neither leader succeeds in forming a new government in the coming weeks, a new election could be called as early as December. In the meantime, Sanchez cannot propose new legislation except in an emergency, potentially delaying the approval of reforms needed to unlock billions of euros in European Union recovery funds in the second half of the year.

Ongoing uncertainty and the prospect of another vote may introduce an element of instability to the economy and hamper long-term growth prospects, according to ING economist Wouter Thierie. Others see only a limited impact, with plenty of recovery funds still flowing and a strong tourism industry.

The International Monetary Fund this week nearly doubled its forecast for Spanish economic growth this year to 2.5% from 1.5%, putting it on course to be one of the world’s fastest-growing developed nations in 2023.

–With assistance from Ainhoa Goyeneche and Joel Rinneby.

(Updates with economist comments starting in fifth paragraph.)

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