Spanish political uncertainty poses risk for economic recovery: central bank

Political uncertainty in Spain in the wake of December's inconclusive election could hurt economic growth due to stalled policymaking, the Bank of Spain said on Friday in its annual report. Spain returns to the polls on June 26 after its political parties failed to agree on the formation of a government following the December ballot. The results of the new vote are expected to be broadly similar, however.
"Uncertainties due to the current internal political context add to increased doubts over the path of economic policies and the implementation of much needed structural reforms aimed at improving future growth rates," the Bank of Spain said. Growth expectations in the medium- and long-term would be improved by taking steps to tackle challenges including high unemployment, fiscal consolidation, lower private and foreign debt and higher productivity, the bank said.
However, Governor Luis Maria Linde said growth rates in the short term and medium term would ease as the effects of the depreciation of the euro and low oil prices wear off. Also citing recent volatility in global financial markets and lower global growth expectations, the Bank of Spain stuck to its forecast of 2.7 percent economic growth this year and 2.3 percent in 2017 after a 3.2 percent rise in gross domestic product in 2015.
The central bank said reining in the public deficit should be a priority for Spain and the next government should be more efficient in balancing income and expenses in its budget plans. In a blow to the caretaker government of the People's Party, which has vaunted its handling of the economic turnaround in the run-up to the election, Spain missed its 2015 deficit target by a wider margin than expected.
Linde also said the country's unemployment rate of 21 percent as of the end of March was one of the country's most significant challenges together with its high external debt and needed to be addressed to win back confidence. Spain's incoming government should examine labour regulation to increase internal flexibility and permit wage adjustments, he said, while permanent contracts should be made more attractive for employers to reduce dependence on temporary hires. For the Spanish banking sector, the central bank warned that low interest rates, declining lending volumes, still high levels of non-performing-loans and foreclosed assets continued to pressure lenders' profitability.