Spain cuts growth outlook

Output will grow by 2.3% next year instead of the 2.6% previously projected, the economy ministry said, 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% 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 Mr Rajoy tries to persuade Catalan President Carles Puigdemont to drop his claim to independence. Mr Rajoy has threatened to take direct control of the region unless Mr Puigdemont backs down by 10am tomorrow.

“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.”

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 charge.

Spain’s benchmark stock index has fallen by about 9 percent since May as the separatist campaign gathered momentum. It rose for the first time in four sessions yesterday. Jefferies equity strategists downgraded their rating on Spanish stocks to modestly bearish, citing the Catalan tensions, while the euro slid for a fourth day.

The strain of the crisis is beginning to show, both in the region and across the rest of Spain.

“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 2.7%. “We believe it is too early to lower our forecasts further.”