The economic impact of the crisis in Catalonia: binary risk, permanent damageDaniel Fuentes Castro
Although the statistical information available still does not allow to be conclusive about the economic impact of the crisis in Catalonia, there is no doubt that the GDP of this Regional Government will suffer a severe slowdown in the fourth quarter of 2017 that could lead it to grow approximately half of what the rest of the Spanish economy will in the final stretch of the year.
There is evidence that registered unemployment in October and November, seasonally unfavourable months, has had a unique behaviour in comparison with the rest of Spain (the same does not happen with the data of Social Security affiliation). There has also been a notable deterioration in the of business confidence indicator, as well as in the flows of foreign tourists and in the registers of guests in hotel accommodation. The number of companies that have moved their headquarters outside of Catalonia since 1st October is currently around 3,000, including the main listed companies in Catalonia. Although we are still waiting for the data of foreign direct investment, everything points to a significant contraction in recent months.
Latest July, the Government estimated a growth of 2.6% of GDP in 2018 for the Spanish economy. As a result of the political crisis in Catalonia, in October it revised this estimate three tenths downwards, to 2.3%.
Three tenths of a percentage point was also the revision proposed by the BBVA and CaixaBank study services, which currently point to growth of 2.5% and 2.4% respectively.
On the other hand, the FUNCAS panel cut the average estimate of the Spanish economy growth for next year to something less than two tenths, to 2.6% (AFI 2.7%).
Institutions such as the Bank of Spain and the Independent Authority for Fiscal Responsibility (AIREF) have grown specific methodologies to try to measure the macroeconomic impact of the political crisis unleashed by Catalonian sovereignty. With analyzes are not directly comparable to each other (or with conventional short-term exercises), the Bank of Spain estimates an accumulated impact until 2019 that ranges between 0.3 and 2.5 GDP points, while the AIREF points to a range between 0.4 and 1.2 GDP points in 2018, depending on whether the impact of the crisis is temporary or permanent.
WE HAVE TO BE CAUTIOUS WHEN IT COMES TO RELATING ECONOMIC CYCLED TO THE POLITICAL ONES
It is worth bearing in mind that the cyclical moment of the Spanish economy, in the absence of the conflict in Catalonia, pointed more to an upward revision of the forecasts than to a generalised correction. So much so that the Minister of Economy and the President of the Government have publicly stated that "if normality returns to Catalonia, "they could raise their forecast for GDP growth by 2018 to between five and seven tenths, until placing it in a band between 2.8% and 3%.
In any case, we should not forget that the true interest of macroeconomic forecasts does not only rest on its predictive capacity but also in the consistency of the story that sustains it.
Accordingly, here are the following some of the elements to take into account when assessing the economic impact of the political crisis in Catalonia.
First, we should be cautious when it comes to relating economic cycles to political cycles. The strength of institutions in Spain and Europe, the globalisation of the economy, value chains and decentralised decision making in an increasingly interdependent world have given the economic cycle a certain resilience in response to electoral fluctuations or localised episodes of political tension. We have seen this in recent years with the interim governments in both Belgium and Spain, and with the limited impact of Brexit on the short-term indicators during the quarters after the referendum.
Secondly, although the conflict in Catalonia is still on-going in its political and social dimensions, in economic terms the risk scenario to avoid was the consummation of a unilateral independence, without a road map and for which Catalonia has never prepared itself. From the point of view of the financial markets, it was a binary risk (independence yes or no), in which the intermediate situations were no clearly defined. The markets do not measure the disaffection among Catalonians, nor the social discontent over Catalonia's fit in Spain; with greater or lesser noise, they are limited to create expectations about the future evolution of corporate profits.
UNCERTAINTY IS NOT GOOD
Thirdly, the impact of the political crisis on the economy is not limited to what happens to the short-term indicators of the quarter in course. What is worrisome is not so much what could be called an autumn cold as the hysteresis effect that the tension suffered during these months can leave behind (permanent damage even after the phenomenon that caused it has waned). Like Brexit, but without consummation of the binary risk, the damage may be greater in the economy's behaviour trend and in the deterioration of intangibles, than in short-term variables. The exit of companies in Quebec after the last independence referendum is not a good precedent for the Catalonia brand.
Finally, uncertainty is not good. Moreover, it seems that the economy has to co-exist with it during a time that is difficult to estimate. Now that the binary risk has been avoided, it is now a question of avoiding permanent economic damage. It is not that we all lose because Catalonia and the rest of Spain share the same market; we all lose because we are the same market.