The PSOE (socialist party, center-left) and UP (Unidas Podemos, left-wing) should govern together, pushing for more social spending and a reversal of previous crisis time reforms. However, policymaking will not be a walk in the park and the coalition will be fragile, which could slow the implementation of structural reforms. We expect moderate risk of early elections in the next year.
What does it mean for markets? Markets have shrugged off the announcements, with no sizable movements on bond or equity markets. Ten-year bond yields slightly declined today from 0.40% to 0.38% - and IBEX 35 equities were down -0.3%. Indeed markets remain driven by the ECB monetary easing, rather than fully pricing endogenous risks. The ECB will step up its easing this year with an additional cut of the deposit rate to -0.6% and continued monthly asset purchases. In addition, despite the presence of Podemos in the government, the risk of major drift in public finances is limited.
What does it mean for companies? We expect an improved outlook for consumer-oriented sectors and small companies, along with potential longer-term benefits from productivity gains due to higher spending on education. However, competitiveness will be reduced in the short term, and higher labor costs could indent profit margins (to below 40% of value added, down from a peak of 44.3%) ; in addition, we expect the construction sectors, the services sectors to be most negatively impacted by a higher minimum wage, banking and energy by higher taxes, and the real estate sector by rent control.
In consequence, we still expect a gradual deceleration of GDP growth in Spain from 2% growth in 2019 to +1.6% in 2020 and +1.4% in 2021. Higher purchasing power due to accelerating salaries and social spending will be a modest buffer for private consumption, amid the slowest job growth since 2014 and an increasing savings ratio. Decreasing competitiveness in an uncertain global trade environment should slow exports. But significant progress on structural reforms and climate-related investment could help growth accelerate again in the medium-term.