Suspense in Catalonia

There are increasing chances that Madrid will impose direct rule on Catalonia. A prolonged stand-off could end up depressing activity, but for now we are not revising our growth outlook for Spain.

This morning, the Catalan president failed to answer clearly whether Catalonia had declared independence or not. He reiterated that he had placed last week’s unilateral declaration of independence on hold in order to open up a “two-month process” to try to reach a deal with the central executive.

Spanish Prime Minister Mariano Rajoy warned that only a clear statement that Puigdemont had not declared independence would stop the Spanish authorities from moving towards activation of article 155, of the Constitution, removing power from the regional Catalonian government. The central government will wait until Thursday at 10am before taking further steps.

Following this morning’s developments, the chances of seeing article 155 activated have significantly increased. However, it is not clear how the central government would interpret this article in practice, particularly how much control the central government would take back from an “autonomous” regional government and for how long. A key factor in determining how the situation in Catalonia unfolds would be whether a soft or a hard version of article 155 were implemented.

Despite political risks, our economic scenario for Spain and more broadly for the euro area remains unchanged. We do not think that, as things stand, these risks will lead to a systemic crisis.

However, prolonged political uncertainty could end up affecting investment sentiment and confidence, depressing economic activity in Catalonia and in Spain at large. But, for now, we see no reason to change our GDP growth forecasts for Spain (3.1% 2017 and 2.5% in 2018) and for the euro area (2.1% 2017 and 1.7% in 2018).

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