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Spain's construction industry first to feel chill of political void

Source: Reuters - Fri 9th Sep 2016
Spain's construction industry first to feel chill of political void

Spain's convalescing construction sector was hoping to move on from a national economic crisis which at its height saw abandoned building sites and bankrupt infrastructure projects littering the landscape.

But a political paralysis that has left the country without a settled government for all this year could stall a return to better times.

Industry figures from builders and designers to material suppliers are expressing concern that no administration is now able to sign off on new projects, compounding years of cuts in public spending.

"It's difficult to distinguish whether the fall in activity comes from the lack of government or because we still haven't pulled out of crisis," said Jose Maria Carbajo, manager at Acento Ingeneria.

His small Madrid-based company had a good run in recent months, winning contracts to repair a Metro line in Madrid and reinforce a bridge in the central region of Castilla-Leon.

,p>But like others in the sector, Carbajo expects the ripple effects from the political paralysis will become clearer in the weeks ahead.

Following two inconclusive national elections, Spaniards could be heading to the ballot box for the 3rd time in a year after acting Prime Minister Mariano Rajoy last week lost a parliamentary vote of confidence for a second term.

The industry is one of the most vulnerable to the lack of leadership which appears to have done little until now to hinder a 3-year rebound from recession. Spain posted growth nearly three times the euro zone average in Q2.

While a flood of foreign funds has jolted the housing sector back to life, public works spending has slumped by more than three-quarters in the past 6 years as the state slashes costs to trim its public deficit, industry figures show.

Cement consumption has fallen to its lowest levels since 1965, according to building materials lobby group Oficemen.

Rajoy's acting government called an end to new spending on all but essential items such as pensions in July, four months ahead of schedule, in a bid to try and keep the deficit in check, and industry players expect the situation to worsen as plans to draw up next year's national budget stall.

"The impact from the budget will be felt from now on," said Eduardo Sanchez, head of projects at Sistema Ingenieria, a Canary Islands-based designer of large-scale projects like roads, bridges and ports.

"Everything that hasn't been signed off so far won't go ahead - that's between a third and a quarter of what they were going to do this year," he said.

Though half of the designer's business came from Spain last year, revenues are holding up thanks to expansion abroad to countries like Senegal and Panama, he added.

Low oil prices and inflation, robust exports and a turnaround in Spain's ailing job market, thanks in part to a record tourism season, have put the economy on course to expand by close to 3 percent in 2016.

Yet with a fully-functioning government, Spain might have posted even higher growth rates, economists say, while it will not be best-placed to ride out the slowdown expected as of 2017 when the recovery moves into a lower gear, closer to 2%.

Spain is unlikely to be able to present a new budget for 2017 by a mid-October deadline set by the European Commission, and the economy ministry has said it would instead file an extended version of this year's plan.

Builders are the ones most likely to feel the pinch as a result going into next year.

"It does not allow you to plan new infrastructure projects, so it means construction companies will feel the paralysis a little longer," said Juan Jose Toribio, professor of economics at the IESE business school.

The sector makes up some 5% of GDP, versus over 10% before a construction crash that began in 2008.

Firms linked to construction, from glass providers to cement suppliers, are clinging on to contracts awarded months ago and overseas markets they branched into after demand at home collapsed during a long recession.

Some builders, including larger ACS, have warned that even with a new budget, deficit constraints mean state-funded infrastructure projects will remain scarce, with maintenance contracts providing the bulk of activity.

But even these need to be signed off.

"The sooner a government is in place, the sooner we'll get some activity," ACS's director general Angel Garcia Altozano told analysts in July, when it reported a 15% drop in Spanish construction revenues for the first half. More than 80% of its sales now come from overseas.

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