RaboResearch - Economic Research

Catalan crisis escalates, economic costs become visible

Economic Report

  • The central government is likely to suspend the Catalan government in the coming weeks
  • Puigdemont has not responded to the request of the central government to backtrack on succession moves
  • The Catalan economy suffers the most from the independence push
  • The rest of Spain might also be slightly impacted. Uncertainty could postpone spending and higher future interest rates could raise debt service costs
  • Importantly, the institutional crisis fills the entire agenda of the central government, due to which necessary reforms are being delayed with possibly a negative impact on future growth

Article 155, there we go

The Spanish government has announced that on Saturday 21 October it will decide upon the measures it will take in line with article 155, to restore legality in Catalonia. Measures could include suspending the entire Catalan government and starting to control the region’s administration from Madrid. The Catalan president had until 10am 19 October to announce that he would discard the referendum outcome. Instead, Puigdemont wrote to Rajoy that the Catalan parliament would vote to declare independence and proceed with its path toward succession if Madrid would not open dialogue and/ or trigger article 155.

Article 155, and then what

It remains very unclear what exactly will happen next. For one, because, article 155 has never been used before. Madrid could decide to suspend the entire Catalan government or to take control of only part of the region’s tasks. Before the central government can actually act, the Senate has to approve the measures. The Senate will gather and vote 27 October. Ultimately, invoking article 155 will lead to new elections in Catalonia, although there is no official timeframe. As the Catalan government does also not know exactly what path will be taken, it might feel it has a very short window to act and declare independence, before it gets ousted from office. At the same time, it might also decide to not act at all, to make Madrid look like the sole bogeyman. But even if the Catalan government will unilaterally declare independence before Madrid takes over, it will not actually mean Catalonia is independent thereafter. Spain, the European Union and very likely all other international organisations will not recognise an independent state of Catalonia. Moreover, the region does not have the institutions necessary to act as if it is independent. And let’s also not forget that, based on polling in the past months, the majority of the Catalans seemingly does not want to be independent, and will remain loyal to Madrid.

As mentioned in previous notes, it will be extremely difficult to put the current institutional crisis to bed. We still believe that in the end Catalonia will stay part of Spain, but it could take many years before tensions recede. Ultimately, a change of both the regional and central government is likely necessary.

The economic cost of the independence drift

As long as the situation does not deescalate, the Catalan economy will continue to suffer from the current uncertainty. Tourism activity, investment intentions, vehicle registrations and business start-ups have dropped in the run up to and/ or after the referendum. On top of that, more than 800 firms have moved headquarters to somewhere else in Spain (see also box 1). The move of headquarters hurts the Catalan economy, but benefits other regions.

Figure 1: Spain’s economic growth is solid
Figure 1:  Spain’s economic growth is solidSource: Macrobond, Rabobank, Nigem

The rest of Spain has been barely hit so far, but uncertainty and possibly higher future interest rates could have a small impact on spending going forward. Our latest forecast pre-dates the referendum. This summer we forecasted economic growth of 3.3 percent in 2017 and 2.5 percent in 2018. Based on data revisions we have updated our forecast to 3.1 percent in 2017 and 2.4 percent in 2018. The slowdown next year mostly stems from lower consumption growth on the back of depleted pent-up demand, historically low household saving rates and lower employment growth. We also expect investment growth to slightly slow on the back of lower export growth, less pent-up demand in most sectors except the construction sector and increased uncertainty.  In our view, the current institutional crisis does not endanger the overall recovery of the Spanish economy. Yet we expect it to subtract another one to three decimal points of growth next year, mostly due to poor performance in Catalonia. We will review our forecast next month, when more data has become available.

As an aside, Spain’s government has recently also revised its economic growth outlook for 2018, from 2.6 percent to 2.3 percent. Reasons behind the downward revision were increased Catalan related uncertainty, moderation of the business cycle and the absence of a budget for 2018.

Possible longer-term impact

The current institutional crisis has several longer-term implications. For one, the institutional crisis fills the entire government’s agenda. As such, necessary policy measures and reforms to improve Spain’s growth potential are delayed, possibly restraining future economic growth. Furthermore, the minority government has not yet been able to get parliamentary approval for the 2018 budget. The government needs the support from the Basque party (PNV), which has said it will not lend its support before the Catalan crisis is over.

Figure 2: Deleveraging has a long way to go
Figure 2: Deleveraging has a long way to goSource: Macrobond, European Commission

In the short term, this means that the government will continue on a no policy change basis. This can be beneficial to growth next year as no additional austerity measures will be taken. That said, with debt just below 100 percent of GDP and a structural deficit of about 3.5 percent of GDP, structural austerity measures are necessary to put public debt on a firm lasting downward path. This is necessary to have scope to accommodate the economy when a next crisis hits and to guarantee debt sustainability in case of adverse interest rate or growth shocks. 

Box 1: Companies leave and tourists stay away

Since the referendum, more than 800 companies have moved their headquarters out of Catalonia to somewhere else in Spain. Among them are six of the seven Catalan firms in the IBEX35. The first step is to move the head office on paper. This lowers the tax base in Catalonia, but does not yet necessarily cause employment. But, generally, within one year the board and other infrastructure have to follow.

Also, tourism in Catalonia has taken a hit. According to the trade association Exceltur, tourism activity was 15 percent lower in the first two weeks of October than in the same period last year. For the remaining part of the year, reservations are down by 20 percent compared to the same period last year. If materialised, this would imply a loss in activity of 1.2 billion, or 0.5 percent of Catalan GDP. Of course it is difficult to completely separate the effects of the terrorist attack in August and the referendum related unrest. Still, less tourism activity due to independence related unrest seems to have a substantial impact on economic growth. The vice president of Excultur has also claimed that tourism related companies seriously lower investments for the remaining part of the year.

Anecdotal evidence suggests that also investments in other sector are being delayed or called off, and the same holds for mergers and acquisitions (more so in Catalonia than in the rest of Spain).


naar boven