Catalonia Crisis Adding New Problems to Spain Economy

 The escalating political crisis in Catalonia has prompted Spain to cut its growth forecast for 2018, according to the government, in a sign of how the tensions are hurting economic sentiment.

In a letter submitted by Spain’s center-right government to European authorities on Tuesday morning, it said the economy would grow 2.3% next year instead of the 2.6% previously projected, AFP reported.

The economy ministry blamed the revisions both on slower global growth as well as on lower consumer spending domestically as a result of the political standoff in Catalonia. Catalonia accounts for a fifth of the Spanish economy.

Tensions have been growing following an illegal independence referendum in Catalonia on October 1, where more than two million people defied the Spanish courts and voted for independence. Catalonia has more than 5.3 million eligible voters.

Since then the Catalan government has been promising to declare independence, threatening to create one of the most serious political and constitutional crises that Spain has faced since its return to democracy in the 1970s.

The Spanish government this week gave Catalan leaders until Thursday to back away from claiming independence or face the possibility of direct rule from Madrid.

In a move that is likely to increase strains in the meantime, late on Monday a judge ordered two leaders of Catalonia’s pro-independence movement to be jailed while they are investigated on possible charges of sedition.

The Spanish state is turning up the pressure on the separatist leaders as Prime Minister Mariano Rajoy tries to persuade Catalan President Carles Puigdemont to drop his push for independence or see Madrid take direct control of the region.

Meanwhile, the euro extended a slide and stocks drifted lower as Spain’s hard-line response to the Catalonian secession threat fueled concern the crisis may intensify. The dollar gained amid speculation the next Federal Reserve chairman will be more hawkish, while treasuries edged lower, Bloomberg reported.

The common currency declined for a fourth day, the longest losing streak since May. The Stoxx Europe 600 Index inched lower following mixed trading in Asian stocks earlier, after North Korea warned that a nuclear war could “break out any moment.”

Gold declined and South Korea’s won led most emerging-market currencies lower. WTI crude resumed its push above $52 a barrel as tensions in Iraq lingered.