Spain is approaching four key weeks in its electoral calendar that will reshape an already fragile political landscape and have repercussions on the economic and investment recovery of the past few years.

Millions of Spaniards across the country head to the polls on April 28 – the third time in less than four years – after socialist prime minister Pedro Sánchez was forced to call elections after Congress rejected his spending plan in March. 

A few weeks later, citizens in Barcelona, the country’s second largest city and business hub and capital of the Catalonia region, will also cast their votes to renew the municipal government against a backdrop of continuous tension with Madrid over the region’s independence.

“In [recent] years, the growth was very exceptional,” says Steven Trypsteen, economist for Spain at ING. “Even though there was political uncertainty, the economy didn’t care very much.”

Despite slowing, the Spanish economy remains in recovery mode after the prolonged recession triggered by the financial crisis; gross domestic product (GDP) contracted by 0.9% between 2010 and 2014. The International Monetary Fund and the Bank of Spain expect annual GDP growth of between 2.1% and 2.2% this year – above the EU average but down from 2.6% in 2018, and more than 3% in the previous three years.

Economic recovery went hand in hand with growing inflows of FDI. According to figures from the ministry of industry, commerce and tourism, productive FDI reached the highest level ever at €46.8bn in 2018, from €27.3bn a year earlier – despite falling FDI into Catalonia, where investment plans have been put on hold and many foreign companies relocated because of tensions stemming from the independence movement.

Spain was the fourth largest recipient of greenfield FDI projects between 2015 and 2018 in western Europe as the country attracted major investment in sectors such as automotive and manufacturing, real estate, business services and tourism, according to greenfield investment monitor fDi Markets.

“In these past years the FDI level remained above 2% of GDP on average, and it was especially high sectors like  manufacturing, where it was enabled by labour market and other structural reforms engineered in order to have a more flexible labour market,” says Miguel Cardoso, chief economist for Spain at BBVA Research. “Because of cyclical and temporary circumstances, in the future this strong recovery might not last, but there are also signs of this is part of a more permanent trend.”

Besides, the upcoming elections are bringing back the shadows that had already emerged in the past recent general elections.  

“In two of the last three general elections we saw an increased level of uncertainty and a higher risk premium of sovereign debt. We estimate that the impact oscillated between 0.2 and 0.3 percentage points of GDP per year since 2015,” says Mr Cardoso.

Elections polls suggest the socialist PSOE party will win a relative majority, but not enough to form a government without the support of other parties, which would weaken Mr Sánchez’s hand in the new legislature. 

“Political uncertainty will play a role as it has negative effects on investments and hiring intentions. The Catalonia situation is not yet resolved and will not have a quick fix. It seems that the political fragmentation in Spain is here to stay,” says ING’s Mr Trypsteen.

In the past, domestic and foreign investors have shown a commitment to Spain that sees beyond its political uncertainties. It's a commitment likely to be tested in the coming weeks.