Spain slashes growth outlook with trade row in mind

MADRID: Spain’s acting government has lowered its growth forecasts due to domestic and external factors such as trade tensions and raised its deficit estimate, just as political gridlock narrows Madrid’s room for manoeuvre on budgetary matters.

In a document that is part of draft budget plans submitted to the European Commission, the government said it expects economic output to expand by 2.1% this year, less than a previous forecast of 2.2%. It sees growth of 1.8% next year, below a previous forecast of 1.9%.

Spain has mostly had caretaker or minority governments for years, meaning the budget has often been simply rolled over from one year to the next.

Spaniards will vote on Nov.10 in the country’s fourth parliamentary election in four years. A caretaker government has been in place since an inconclusive poll in April.

Spain left the budget deficit forecast unchanged from its target of 2% of gross domestic product this year, but raised it to 1.7% of GDP from a previous 1.1% for 2020.

This takes into account the fact that new taxes, including on global technology companies, that were planned earlier this year could not be adopted in parliament.

The Budget Ministry said the forecast for 2020 could be revised if and when Spain is able to form a government and pass a budget in parliament.

Later on Tuesday, the International Monetary Fund also cut Spain’s economic growth forecast by 0.1 per centage points apiece in 2019 and 2020, to 2.2% and 1.8% respectively, as part of its updated World Economic Outlook.

The euro zone’s fourth largest economy has consistently outperformed much of Europe since it emerged from a five-year slump in 2013, and the 2019 forecast still points to a growth well above the projected 1.1% growth rate for the currency bloc.

The ministry said in the document that Spanish growth would moderate from previous years, citing “an increasingly uncertain international context marked by the slowdown in economic activity and the persistence of commercial and geopolitical tensions that affect international trade and investment”.

The Budget Ministry said the cut in the growth forecast was also due to a change in the methodology Spain uses to calculate GDP.

The figures sent to Brussels include a 0.9% raise in state pensions and a 2% in public workers’ salaries, but otherwise largely keep to the budget approved in 2018 by the previous conservative government of Mariano Rajoy.

In a recent TV interview, acting Prime Minister Pedro Sanchez said that, if elected next month, he aimed to get a budget approved by parliament in the first quarter of 2020.

On Tuesday, Economy Minister Nadia Calvino told RNE radio she could not rule out a global economic crisis but that “the probability right now (is) not very high, nobody sees Europe entering into recession in the short term, and less so Spain”.

On Monday, European Central Bank (ECB) Vice-President Luis de Guindos also ruled out a recession in Europe but foresaw the bloc experiencing lower economic growth for a longer period.

The government’s downward revisions come after the Bank of Spain said in September that the Spanish economy was likely to grow much more slowly than expected this year due to weaker investment and private consumption and a slowdown in Europe.

Meanwhile, the European Investment Bank (EIB) has postponed taking a decision on whether to stop financing fossil fuel projects to November, an official said on Tuesday, as the multilateral lender works out whether to keep financing gas projects for a period.

The bank’s president, Werner Hoyer, is pushing for the bank to take the lead in financing sustainable projects, and proposed in July to stop its fossil fuel lending by the end of 2020.

But Germany, Europe’s biggest economy and the EIB’s biggest shareholder, wants the bank to continue financing projects linked to natural gas, which produces less greenhouse gas emissions than coal or oil and which Germany and some other states want to use as a fuel to transition away from coal.

“On the basis of what we discussed this morning I am increasingly confident that we will achieve final approval in November,” said Andrew McDowell, an EIB vice-president, told Reuters in an interview during the meeting.

The EIB’s board, made up mostly of European Union finance ministers, has been discussing ways to make the bank greener by ending financing for fossil fuel-powered energy projects, but some countries heavily dependent on coal or gas have opposed the total ban of fossil fuel lending.

Germany, Italy, Poland and Latvia want the bank to keep funding certain gas projects to help the transition from coal or nuclear power, or for energy security reasons.

McDowell said the delay would “allow some more national reflection” after some countries asked for clarification on the proposal from EIB to completely stop funding fossil fuel-linked projects from the end of next year. EIB figures show it funded almost 2 billion euros ($2.10 billion) of fossil fuel projects last year, drawing ire from Green lawmakers and environmental groups.

“The possibility of transforming the European Investment Bank into a climate bank is vanishing,” said Alex Doukas, lead analyst at think tank Oil Change International, joining other environmental groups such as WWF urging member states to support the EIB proposal at the upcoming Nov.14 board meeting.

Reuters