Spain's Prime Minister, Pedro Sanchez, called for a snap election Friday in an effort to break a budget deadlock in Europe's fourth-largest economy that threatens to revive tensions linked to Catalonia's failed independence vote in 2017.
Following a defeat for his minority Socialist government's spending bill earlier this week, Sanchez has opted for fresh elections -- after less than a year in office -- in order to win support from rivals and form a more stable administration in Madrid. At present, polls suggest neither his Socialist party, nor the center-right Ciudadanos party or the traditional conservative lawmakers from the People's Party would gain enough votes to command a majority in the 350-seat chamber. The vote is set to take place on April 28th.
"Given the weaker external environment, we also see the Spanish economy slowing further in 2019 to about 2% annual growth," said ING economist Steven Trrypsteen in a recent client note. "Political gridlock could further hamper the economy, though the better state of the economy should make political tensions less dangerous than a few years ago."
"We don't exclude some widening in Spanish bond spreads, but this is unlikely to go very far," he added.
The euro was little-changed at 1.1277 against the U.S. dollar following news of the snap poll, while yields on Spain's benchmark 10-year government bonds rose 3 basis points to 1.27%
Sanchez's 2019 budget bill was defeated earlier this week when lawmakers from Catalonia abandoned the government and voted against the spending proposals after it refused to discuss the prospect of another independence referendum.
That rejection was amplified by the start of a trial of 12 Catalan separatists the previous day in Madrid, each of whom face charges of sedition, rebellion and the mis-use of public funds and could be sentenced up to 25 years in prison for their alleged role in the failed 2017 vote.
Spain's 2018 budget will now roll-over into this year, keeping the country's budget deficit in the region of 2.4% of GDP, a figure that is withing the European Union's rules but is markedly higher than proposed in Sanchez's defeated bill.
That could be an issue for European investors as the broader economy continues to slow amid both weakening domestic demand and rising political uncertainty linked to Britain's impending exit from the bloc and Italy's chaotic populist government, which has steered the region's third-largest economy into its third recession of the decade.
Earlier this month, the European Commission slashed its growth forecast for the European economy, but stopped short of predicting a deeper recession in Italy, as the region braces for the impending departure of its biggest trading partner when Britain leaves the bloc at the end of next month.
In its regular quarterly forecasts, the Commission said it sees broader Eurozone growth to slow to 1.3% this year, down from a prior forecast of 1.9% before rebounding modestly to a 1.6% growth rate in 2020.
The new forecasts were notably lower than the Commission had estimated in November and also included softer projections for currency area inflation of 1.4% for this year, well shy of the European Central Bank's 'just below 2%' price stability target.
"This slowdown is set to be more pronounced than expected last autumn, especially in the euro area, due to global trade uncertainties and domestic factors in our largest economies," said EU Economic Affairs Commissioner Pierre Moscovici.