Limited market reaction to Catalan developments

Markets remain sanguine ahead of Catalan elections in December, but continuing uncertainty could hurt investor sentiment.

On 27 October, the Catalan parliament voted for a unilateral declaration of independence. The same day, the Spanish senate approved the terms of application of Article 155 of the constitution, allowing Madrid to impose direct rule on Catalonia. Prime Minister Mariano Rajoy called a snap election in Catalonia for 21 December, earlier than any dates that had so far been mooted, with the aim of keeping direct rule as brief as possible.

The market’s reaction to the independence declaration and the central government’s response has been relatively limited, suggesting that investors believe the risks associated with Catalonia are contained for now.

We do not think that, as things stand, these risks will lead to a systemic crisis. For now, there is little indication that the crisis in Catalonia has had any significant macroeconomic impact on Spain. However, if it is prolonged, political uncertainty could end up affecting investment sentiment and confidence, depressing economic activity in Catalonia and in Spain at large.

GDP data published this morning showed that the Spanish economy still has momentum, expanding by 0.8% q-o-q in Q3, in line with consensus expectations. This was the 16th successive quarter of positive growth in Spain. The expenditure breakdown will not be available before 30 November, but robust domestic demand is likely to have been the main growth driver. Even if GDP is flat in Q4, the Spanish economy is on course to grow by 3.0% on average this year.

Our real GDP forecast for Spain (3.1% 2017 and 2.5% in 2018) is left unchanged. The slowdown expected in 2018 is mainly due to the diminished impact of factors that supported activity in 2015-16, such as low oil prices and expansionary fiscal policy. The ongoing improvement in the Spanish labour market is likely to continue to support private consumption.

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