Spain: Headwinds ahead but Bonos to stay solid

Highlights:

• In Spain, the new, fragile left-wing minority coalition plans to unwind key elements of the 2012 labor market reforms and intends to increase income and corporate taxes.
• Activity will diminish on the back of reduced employment growth, receding economic slack, an upwards adjustment in the household savings rate and elevated political uncertainty.
• We see GDP growth moderating towards 1.4% by 2021, broadly in line with potential. Thereby we expect the outperformance of Spain against the euro area lasting since 2015 to narrow significantly.
• The excellent performance of Spanish sovereign bonds in recent years will fade out. While moderating, Spanish growth will remain above the euro area average and fiscal metrics are seen to improve slightly. Amid the search for yield this will trigger somewhat tighter sovereign spreads and Spanish Bonos are expected to perform better than euro area core government bonds going forward.

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