The next general election, which is due by March 2008, is likely to be closely fought between the incumbent Spanish Socialist Workers' Party (PSOE) and the opposition Popular Party (PP). Neither party is likely to win an overall majority, but the Economist Intelligence Unit forecasts that the PSOE will emerge narrowly as the largest party and form another minority government that depends on the support of one or more regional parties. Economic policy will change little. Fiscal policy will remain expansionary, and we forecast that the current fiscal surplus will move into deficit by 2009. We forecast that domestic demand growth will slow sharply in the next two years, reflecting the end of a prolonged building boom and retrenchment by indebted households. Inflation increased in September to 2.7%, but should average 2.4% in 2008 and 2.2% in 2009. The current-account deficit is likely to widen this year, but will narrow a little in 2008-09.