The Bank of Spain warns of the medium-term economic consequences of persistent political tension in Catalonia.
In a report analyzing the risk to Spain’s financial stability, the central bank indicated that the economy could lose between 0.3 and 2.5 points of GDP in two years, which would represent between 3 and more than 27 Billions of Euro’s.
In the worst-case scenario, up to 60% of all projected growth for 2018 and 2019 could evaporate into thin air, according to the Financial Stability Report, released on Thursday.
The Bank of Spain notes that these are all hypothetical scenarios
Catalonia runs the risk of suffering the worst and entering a full-fledged recession.
“A potential worsening or prolongation of the political situation could negatively impact the economic outlook and financial stability in Spain,” the report said. “Greater uncertainty could shake the confidence of economic agents and thus affect their spending and investment decisions, subsequently exerting a negative impact on economic activity and employment.”
The report also highlights “the political tension in Catalonia and its potential repercussions on financing conditions in capital markets and on the Spanish economy as a whole”.
So far, the report says, the effect of the political tensions in Catalonia has been visible above all in the financial markets: “In addition to the global risk factors, the Spanish financial markets are exposed to other specific risks and, in in particular, to those related to political tensions in Catalonia.
Catalonia risks suffering the worst and entering a full-scale recession
But the effects could extend to household spending, business investment, hiring decisions and financing terms. In the medium term, specifies the Bank of Spain, “the macroeconomic impact of the current situation of uncertainty will depend on both its intensity and its duration”.
Analysts considered two scenarios. Most benign sees the worst of the uncertainty end at the end of the year, when new elections are scheduled. The cumulative cost for the economy would be three tenths of a point, or around 3 billion euros, for the period 2018-2019.
But there is a harsher scenario in which the Catalan conflict persists over the next two years, creating a situation similar to the start of the economic crisis in 2008, or when Spain was on the brink of a bailout in 2012.
Greater uncertainty could shake the confidence of economic agents
“This last scenario would lead to a reduction of almost 60% in the growth envisaged in the reference scenario for the whole of the Spanish economy, and a recession of the Catalan economy over a large part of the horizon analyzed”, indicates the report.
The Bank of Spain notes that these are all hypothetical scenarios that depend on a set of assumptions and should not be interpreted as growth forecasts. But “in any case, they serve to highlight the risks and the significant economic costs of the situation caused by the independence initiatives in Catalonia”.
The Bank of Spain was the first institution to warn that political instability in Catalonia could harm consumption, investment and financing conditions.
English version by Susana Urra.