Domestic demand leads Spain economy growth

Spain household consumption (contributing for two-third of the Q2 growth number) continued to benefit from low interest rates (as the bulk of mortgage debt is in variable rates), low inflation, the ongoing tax reform and the improving labour market. INE is likely to confirm the 1.0% qoq GDP growth in Q2, says Societe Generale. The details will show that domestic demand explains the bulk of the growth in Q2.

Favourable financial conditions and lower taxes also supported the country's investment together with improved demand prospects. Net export is expected to have been broadly slightly negative in Q2. However, after a very strong H1, H2 and 2016 GDP growth is expected to slow down significantly - as many temporary factors (negative inflation in particular) will recede, says Societe Generale in a research note on Thursday. 

On top of that, as both corporate and household indebtedness remain close to their pre-peak levels, the de-leveraging process is not over. As a result, the recent strong consumption and investment growth do not appear sustainable, adds SocGen. Finally, with the Catalonian regional elections in September and the national elections in late November, risks of  political stalemate, uncertainty and lack of reform are elevated, weighing on businesses' hiring and investment decisions.