Spain cut its economic forecast for 2018 as the costs of the Catalan crisis begin to mount.
Output will grow by 2.3 percent next year instead of the 2.6 percent previously projected, the economy ministry said in an emailed statement just before midnight, citing the impact of the political standoff in Catalonia, which accounts for a fifth of Spain’s gross domestic product, and the related struggle to approve a budget.
The Spanish economy is set to grow by 3 percent for a third straight year in 2017 after Prime Minister Mariano Rajoy’s reforms helped the country shake off the worst recession in its modern history, earning the endorsement of the European Commission. The standoff in Catalonia is set to put a dent in that run.
The Spanish state is turning up the pressure on the separatists as Rajoy tries to persuade Catalan President Carles Puigdemont to drop his claim to independence following the illegal referendum on Oct. Rajoy has threatened to take direct control of the region unless Puigdemont backs down by 10 a.
“What we worry about on Thursday is escalation,” Simon French, chief economist at Panmure Gordon & Co., said in a Bloomberg Television interview. “If this escalates it starts to become a much broader market event than just Spanish banks. You start to question the European Union being drawn into this and distracting them from what has been quite a good growth story for the last two to three years.”
Stocks Fall
Escalation may be on the cards though. Judge Carmen Lamela jailed two leading separatists on Monday as a precautionary measure as she investigates potential sedition charges against them. Defense Minister Maria Dolores de Cospedal, who last week hinted that she’s ready to send the army into Catalonia to assert control, is due to visit troops stationed in Barcelona at 3 p. with activists plotting demonstrations in support of the “political prisoners.”
Spain’s benchmark stock index has fallen by about 9 percent since May as the separatist campaign gathered momentum. It was little changed at 12:43 p. on Tuesday, gaining 0.1 percent to snap a run of three straight declines. Jefferies equity strategists downgraded their rating on Spanish stocks to modestly bearish, citing the Catalan tensions, while the euro slid for a fourth day.
Lamela said that it was very likely that Jordi Sanchez and Jordi Cuixart, leaders of the two civic groups that have led the Catalan independence campaign, could hide, alter or destroy evidence against them if they were released. The potential sedition charges carry jail terms of up to 15 years.
Catalan Police Chief Josep Lluis Trapero, another subject of the National Court probe, was told to surrender his passport and report back to the court in Madrid every two weeks. All three say they are innocent.
“Sadly, we have political prisoners again,” Puigdemont said on Twitter. “They are trying to imprison ideas, but they make the need for freedom even greater.”
Talk of Crisis
The regional government meets Tuesday in Barcelona to consider its options with chief spokesman Jordi Turull due to speak at a press conference from about 1:30 p. Separatists are planning a halt in workplaces at noon and a candlelit vigil in the center of Barcelona from 8 p.
“The question is whether Catalonia responds with civil disobedience causing the Catalonian economy to deteriorate sharply,” said Florian Hense, an economist at Berenberg in London, who recently trimmed his 2018 growth forecast to 2. “We believe it is too early to lower our forecasts further.”
More than two weeks after Catalonia made global headlines as Spanish police beat activists as they tried to defend their makeshift ballot, the strain of the crisis is beginning to show, both in the region and across the rest of Spain.
CaixaBank SA, the symbol of Catalonia’s economic strength, led an exodus of companies shifting to other parts of Spain to shield themselves from the risk of a disorderly breakup. Codorniu Raventos, a sparkling wine producer founded in 1551, said on Monday its holding company would move its legal base from Catalonia to La Rioja because of the legal and political uncertainty caused by the crisis.
The minority government is also struggling to approve its 2018 budget, adding a further drag on growth, as its Basque allies withhold support in protest at the crackdown in Catalonia.
Unless the Catalan government backs down, Spain “could once again see a crisis like the one that hit the euro at the end of 2011,” Budget Minister Cristobal Montoro said at an event in Madrid Monday. His comments were reported by El Economista newspaper.
— With assistance by Manuel Baigorri, Thomas Gualtieri, Angeline Benoit, and Maria Tadeo.
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