Little market reaction to escalating Catalan dispute

While markets have remained stoic about evolving political situation in the region, prolonged uncertainty could have an impact.

The response given by the Catalan President Carles Puigdemont to the Spanish government’s ultimatum last week did not provide the clarity the central government was seeking on whether or not the Catalan parliament would formally declare independence.

As a result, the central government therefore has decided to invoke Article 155 of the Spanish constitution, for the first time since Spain embraced democracy in the late 1970s. A broad set of measures awaits approval by the Spanish Senate, the upper chamber of parliament, which is scheduled to deliberate on Friday. This means the Catalan government still has time to act. For its part, the central government has announced that application of Article 155 will be gradual and will depend on the Catalan government’s actions over the coming days.

The Catalan president is facing the dilemma of whether to ask the regional parliament to vote on a declaration of unilateral independence or to call regional elections before the Senate vote. A plenary session of the Catalan parliament is scheduled for Thursday. However, it is not clear whether new elections would significantly change Catalonia’s political landscape, the most recent polls on Catalan voting intentions show that pro-independence parties would lose their absolute majority if elections were held now.

In the meantime, market reaction remains muted, with investors believing the risks associated with the situation in Catalonia are contained for now. Indeed, we do not think that, as things stand, these risks will lead to a systemic crisis.

However, prolonged political uncertainty could end up hurting investment sentiment and confidence, depressing economic activity in Catalonia and in Spain at large. Thus, the focus will eventually shift from the political to the economic impact of Catalonia’s moves to secede. But for now, there is little indication that the uncertainty has had any significant impact at the macroeconomic level in Spain. As a result, our real GDP forecast for Spain (3.1% 2017 and 2.5% in 2018) is left unchanged.

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