The Bank of Spain has today hiked its growth forecasts for the Spanish economy this year and next.

But it warned in the wake of an inconclusive general election of potentially damaging uncertainty over reforms and budget policies. 

The vote on December 20 delivered a highly fragmented result, making it hard for any party to form a government and heraldingw eeks of tough negotiations as the centre-right People's Party (PP) seeks allies to stay in power. 

The Bank of Spain said that potential headwinds for the economy included doubts over policy in Spain, as well as a potentially harsher-than-expected slowdown in emerging markets. 

"Internally, the main source of uncertainty is associated with the evolution of economic policies, given how much the reform agenda and budget policies in particular affect confidence," the Bank of Spain said in a monthly report. 
              
The economy has recovered from a recession to become one of the fastest-growing in the euro zone this year, as high unemployment started to fall off, boosting domestic spending. 

On a quarterly basis, the pace of growth slowed slightly in the July to September period, reaching 0.8%.

The Bank of Spain said today it expected the economy to expand by 0.8% once again in the fourth quarter. 

It also raised its annual growth forecast for 2015 to 3.2% from 3.1%, and for 2016 to 2.8% from 2.7%. Official preliminary data is due on January 29.

"The slight slowdown observed in the second half of the year... does not alter the central scenario of sustained growth in gross domestic product in the coming quarters," the Bank of Spain said. 

Prime Minister Mariano Rajoy's PP had pinned its hopes of securing another term in office on the economic rebound, but it has also been hit hard by corruption scandals and many Spaniards are still worse off than they were before the downturn. 
           
The PP imposed deep spending cuts at the height of the recession and pushed through a labour reform that makes it easier for companies to fire staff - policies that were praised by some economists and European Union partners but which have been unpopular with voters. 

Rajoy's party fell far short of a majority in parliament, and left-wing opponents have already signaled they will not support a government led by the party. 

An alliance of left-wing parties, including anti-austerity newcomer Podemos ("We Can"), is another option, but even by clubbing together they may still struggle to reach a sufficient number of seats or form a stable government.