World Economy

Catalan Uncertainty Denting Spanish Growth

Catalonia prepares to vote yet again.Catalonia prepares to vote yet again.

Political uncertainty in Catalonia has dented expectations for growth in Spain’s economy, the country’s central bank said on Friday, as voters in the region gear up for an election that pro-independence parties have an even chance of winning.

The economy will grow by 2.4% next year and 2.1% in 2019, the central bank forecast on Friday, marginally down from previous estimates of 2.5% and 2.2%, Reuters reported.

Central authorities have governed the northeastern region from Madrid since the end of October, when its parliament unilaterally declared independence following an illegal referendum.

The Catalan political backdrop had become an additional factor in economic projections for the next few years, the Bank of Spain said, adding that any negative effect was partially offset by improved expectations of growth in external markets, especially within the eurozone.

It also said that its central scenario was that “the level of uncertainty registered over the last few months will abate during the first part of 2018.”

The region’s independence movement has had its wings clipped by the Spanish courts and lost some political momentum after its leaders failed to agree a joint platform for contesting the Dec. 21 regional election.

But surveys show the pro-independence parties running neck-and-neck with unionists, meaning a re-launch of the secessionist push cannot be ruled out.

The central bank also expects Spain’s high rate of employment creation of the past few years to slow as the economy decelerates, though the jobless rate should still drop to 11% by the end of 2020 from 16.4% in the third quarter.

Inflation would be 2% this year, but would then hold below the European Central Bank’s target of just under 2% through until 2020, it said.

Medium-term external risks to growth included the high valuation of certain financial assets, China’s ability to adjust economic imbalances and the consequences associated with Britain’s divorce from the European Union.

Catalonia generates nearly a fifth of Spain’s GDP, but uncertainty about the independence drive has made businesses nervous. About 3,000 companies have transferred their legal headquarters—but not their employees—elsewhere, either because of doubts about their legal status in case of secession, or a risk of having their products or services boycotted.

Banks in particular, including CaixaBank and Banco Sabadell, worry that they could be cut off from access to European Central Bank financing. 

The moves have dented the region’s business-friendly reputation and could make it harder to lure new companies in the future, though the central government in Madrid has called on companies to return to the region.

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