Spanish general election: Expect a minority government

The political landscape of Spain has changed radically as two new parties are now polling strongly in third and fourth place (Podemos and Ciudadanos), taking voters away from traditional parties, including the two main ones, PP and PSOE. The latest polls signal that the conservative PP and socialist PSOE are very close to each other (21-24%), with PP marginally ahead. The government expects that the strength of the Spanish economy (annual growth at over 3%, falling unemployment and rising disposable income) may give an extra kick to the governing party (PP) by 20 December. 

The radical-left Podemos has been on a downward trend since reaching peak support in January 2015. Vote intention is now at 14-17%, which suggests a Podemos-led government looks highly unlikely. Ciudadanos, the moderate pro-reform party, has been relatively stable with a support of 10-12%. Other national parties have considerably lower support.

Possibly the most relevant market risk would be whether the new government rolls back some of the key reforms enacted over the past four years, including the fiscal stability law, pension reform and several labour market reforms. To some extent, the strength of the recovery is due to competitiveness gains, more favourable investment conditions and confidence gains supported by those government policies. A PP-Ciudadanos or PSOE-Ciudadanos would be low-risk coalitions and could even build on past reforms. A PSOE-Podemos could create some market concerns as Podemos has been very vocal against each one of these reforms -- Podemos could propose amendments to those reforms as a pre-condition for a coalition with PSOE.