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It has been a tense few months in the lead up to and in the aftermath of Catalonia’s independence referendum that was held on 1 October. Both pro-independence separatist groups and pro-unity groups have taken to the streets of Barcelona on occasion to peacefully protest while both the Catalan and Spanish governments have volleyed shots back and forth at one another.
Although the referendum was illegal according to the Spanish constitution, Catalonia went ahead with the vote nonetheless. With no legal guarantees and many Catalans against the vote staying away, 90% voted ‘yes’ albeit with only a 40% voter turnout. A week later, in a rather confusing speech before Catalan parliament, President Puigdemont declared that they had “brought democracy back to Europe” and claimed that the semi-autonomous region had won its right to independence, stopping short of an all-out declaration. Spanish authorities demanded that he clarify his position after the speech, however, with no answer coming from the Catalan president, the Spanish government triggered Article 155 for the first time since the constitution was ratified in 1978.
Still conditional on approval from the Senate, the unprecedented move will enable the central government to seize powers from the Catalan administration and bring the semi-autonomous region under Madrid’s direct control. In response, on 26 October Puigdemont was expected to call a snap regional election set for 20 December. However, he unexpectedly decided not to call for elections and instead lobbed the decision over the fence to the Catalan parliament stating that the Spanish government’s actions would not allow him to call for elections now.
Despite the turbulent political scene in Spain, financial markets have been fairly calm. Nonetheless, many large corporations based in Barcelona, the region’s capital, have either already moved headquarters or have stated they will do so if the situation escalates further as many citizens move their money to banks outside the region. According to El Pais, some 1700 businesses have already moved their headquarters out of the region. Tourism is also likely to be hurt, one of the region’s most important revenue streams.
Now it’s a waiting game to find out how the Spanish government responds on 27 October, however, it is expected that the Spanish Senate will approve Article 155 to seize power from Catalonia. The Catalan parliament may also move to vote on a declaration of independence on the same day. While we wait to see how it plays out, we asked 7 economic experts from the likes of Oxford Economics, Capital Economics, BMI Research and more for their views on how the situation could unfold and affect the economies of the region and the country as a whole.
Angel Talavera, Senior Eurozone Economist at Oxford Economics
What impact do you see the Spain-Catalonia situation having on the a) the region’s economy and b) the wider Spanish economy in the near term?
“The political crisis will inevitably have some impact on economic activity. This could happen through a variety of channels: uncertainty could cause investment decisions to be postponed and/or cancelled, the impact that political uncertainty can have on financial markets (bonds and equities) and finally the potential hit to the tourism sector, if particular if social unrest leads to increased safety concerns. But in order to evaluate the net effect on the Spanish economy, it will be essential to gauge how much of this impact is softened by transfers between regions (for example, tourists swapping Catalonia for other destinations in Spain or investment projects being relocated to other areas within the country). The effect on the Eurozone economy will largely depend on the final impact on Spain, but at this point we do not think this will have a significant impact on the strong recovery currently taking place in the Eurozone. With the help of the ECB, the reaction in bond markets has been extremely muted, so investors do not seem to be very concerned about political risk at the moment, which is a key difference compared to the years of the European sovereign debt crisis.”
How has the situation affected your forecasts for the Spanish economy?
“We are not revising our forecasts yet, because we want to avoid a knee-jerk reaction of cutting forecasts with such limited information available. We want to see more clarity on the political front and also what economic indicators in the coming weeks will tells us about the initial impact of the crisis before deciding on a revision. But we are conscious that downside risks are increasing, so it is likely we will cut a few decimal points off our 2018 GDP forecast in the coming weeks.”
What is your long-term outlook for the Spanish economy given the current situation in Catalonia?
“The situation in Catalonia has not altered our long-term view of the Spanish economy, as this a risk we have been aware of for several years now. A hypothetical independence would be a massive blow but we think the risk of that happening is remote. As such, our long-term forecasts for Spain remain unchanged and continue to see a gradual deceleration in economic growth towards what we consider a more realistic growth path according to potential growth. The longstanding challenges for the Spanish economy continue to be the usual: weak fiscal position, high unemployment, low productivity growth and the need for a reform in the pension system, among others.”
Edward Stevenson, Economist at BMI Research:
What impact do you see the Spain-Catalonia situation having on the a) the region’s economy and b) the wider Spanish economy in the near term?
“Catalonia’s regional economy will undoubtedly suffer over the coming months, as a period of protracted uncertainty takes hold. Even if an immediate solution to the current crisis is found, the central government’s actions in recent weeks will ensure tension and unrest remain elevated beyond the near term. This will represent a persistent drag on consumer and business confidence, weighing on economic activity in the process. On top of this, elevated uncertainty will see more and more corporations locate out of the region, as has already been clearly evident in recent weeks, while tourism – a major growth driver – is also likely to suffer.
“The Spanish economy’s near-term economic outlook is inextricably dependent on the success of the Catalan economy, given that the latter accounts for around 20% of total gross domestic product in Spain. Therefore, any slowdown in Catalonia will concomitantly weigh on the wider Spanish economy.”
How has the situation affected your forecasts for the Spanish economy?
“We will be looking to revise our growth projections over the coming days, once we have had time to assess the current landscape.”
What is your long-term outlook for the Spanish economy given the current situation in Catalonia?
“Regardless of how the crisis eventually plays out, support for secession will remain strong, ensuring instability is elevated and the threat of unrest is prominent in the years ahead. A severe escalation of tensions, and the realistic possibility of further unrest at some point down the line, will remain a threat to economic activity, posing downside risks to Spain’s longer-term economic outlook.”
Julián Pérez García, Economist at CEPREDE:
What impact do you see the Spain-Catalonia situation having on the a) the region’s economy and b) the wider Spanish economy in the near term?
“Although it’s a process started some years ago, it has worsened in recent weeks, so that, it is too soon to see quantitative effects on real economy, by now.
“Undoubtedly the increase in uncertainty is already generating some economic effects such companies’ relocation to other Spanish regions and some reduction in tourist flows that, sooner or later, will slow down the Catalonian growth rate.
“Any case, the final impact is quite uncertain as the process is still open. In the most probably scenario of no secession, the global effect would be moderated and transitory and it would be concenter in Catalonia.”
How has the situation affected your forecasts for the Spanish economy?
“As our mains scenario does not include the effective independence we have not make any significative correction in our forecasts for current year and for 2018.Maybe, in coming months some downward revision for 2018 growth rate could be necessary as new updated information for real indicators becomes, but we don’t see any change higher than a couple of tenths.”
What is your long-term outlook for the Spanish economy given the current situation in Catalonia?
“Obviously, this is highly linked to the alternative scenarios about effective independence and the new rules after that.
“In a central scenario of no-secession we don’t see large changes in average growth rate that would remain in a band between 1,5 an 2% at medium term, an slightly below in a long term.
“The alternative scenarios with an effective secession are quite diffuse, and different studies show a wide range ranging from positive effects of about 3% of GDP to negative impacts close to -20% for Catalonia.
“For the rest of Spanish economy, these effects would range between -1% to -5%.”
Stephen Brown, European Economist at Capital Economics
What impact do you see the Spain-Catalonia situation having on the a) the region’s economy and b) the wider Spanish economy in the near term?
“If the situation continues to drag on, it is likely to have negative effects on the region’s economy. But we don’t expect it to have significant implications for Spain as a whole. Our best guess is that the situation could cause annual Catalan GDP growth to slow by around 0.5%-pts for as long as it persists. As Catalonia accounts for 19% of Spain’s economy, this would reduce Spanish GDP growth by just 0.1%-pt.”
What is your long-term outlook for the Spanish economy given the current situation in Catalonia?
“Our base-case is that Catalonia remains a part of Spain, but with more fiscal autonomy and a smaller fiscal transfer to the rest of Spain. This would have implications for economic conditions within Spain by region, but not huge conditions for the aggregate picture. While we can’t rule out Catalan independence, we assume that if this were the eventual outcome then it would be as a result of Catalonia agreeing to take its share of the national debt. In this event, any negative effects for the rest of Spain would be far more manageable then if there was some sort of unilateral declaration of independence.”
Athanasia Kokkinogeni, Western Europe analyst at Frontier Strategy Group
What impact do you see the Spain-Catalonia situation having on the a) the region’s economy and b) the wider Spanish economy in the near term?
“The Catalan crisis is already driving investments out of Catalonia, benefiting Madrid in the near-term. Banks like CaixaBank, Banco Sabadell, and other large firms have confirmed plans to shift headquarters to Madrid, or relocate their offices. No impact is expected in the wider Spanish economy in the near term, as no firms have declared interest to divest from Spain because of the Catalan crisis, apart from relocating from Catalonia.”
How has the situation affected your forecasts for the Spanish economy?
“I haven’t revised my forecasts downward for the Spanish economy since the Catalan crisis, as it has driven only domestic relocation of firms. The latest consumer and business confidence figures, and manufacturing and services survey results continue to impress this month along with robust exports, highlighting the strong momentum of the economy.”
What is your long-term outlook for the Spanish economy given the current situation in Catalonia?
“My long-term outlook is still positive for Spain, and hasn’t changed because of the Catalan crisis. Solid consumer spending, exports and tourism will drive the outlook. Regarding the Catalan crisis, I expect some form of resolution through the Catalan snap elections planned by April 2018. Essentially, the Catalans want independence, but with legality, and this is reflected into sentiment. Carles Puigdemont’s minority government has weakened after the crisis and the mainstream front has gained popularity, signaling that the new government will be more conformist, and in turn Madrid will be more eager to negotiate with Catalonia.”
Pierre Vernet, Economist at Goldman Sachs
“From a pure economic standpoint, greater fiscal autonomy across Spanish regions (a possible outcome of the recent events in Catalonia – the Spanish PSOE has recently supported a constitutional reform in that direction) could lower the degree of ‘risk sharing’ among these regions, thereby exposing the Spanish economy to the same sort of vulnerabilities that the Euro area faces (i.e., monetary integration vs. fiscal fragmentation, and the difficulty to neutralise asymmetric shocks).”
Unicredit Economists
“The Catalonian crisis remains a risk. However, the market has correctly treated it as a predominantly idiosyncratic risk for Spain that would not have wider consequences for the Eurozone. Any renewed flaring up of the situation would therefore be of more concern for Spanish spread levels than for the currency, where we expect the euro to hold up well.”
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