Catalonia Risk Hangs Over Spain as EU Raises Growth Forecasts

(Bloomberg) -- The European Commission raised its forecasts for Spain’s economic growth this year and next while warning that the dispute with Catalan separatists could undermine that outlook if it’s not kept under control.

The Spanish economy will expand by 3.1 percent this year and 2.5 percent in 2018, the commission said in its outlook on Thursday. That compared with projections for 2.8 percent and 2.4 issued in May. The potential impact from a further escalation in Catalonia is impossible to estimate at this point, according to the report.

“Market reactions to recent events in Catalonia have remained contained,” the commission said. “The risk exists that future developments could have an impact on growth, the size of which cannot be anticipated at this stage.”

While the political situation has calmed since the central government suspended the rebel administration to take direct control of Catalonia, the conflict is weighing on the outlook for business and investment. Last month, the Spanish government cut its 2018 growth forecast to 2.3 percent from 2.6 percent factoring in a slowdown in Catalonia -- which accounts for about 20 percent of Spain’s economy.

Analysts at Banco Bilbao Vizcaya Argentaria SA also reduced their growth forecast for next year to 2.5 percent from 2.8 percent citing political uncertainty. The Bank of Spain estimates the crisis could shave as much as 2.5 percentage points from the nation’s gross domestic product over the next two years in the worst case scenario.

Political uncertainty is the main risk threatening a recovery that continues to outperform the euro area. The Spanish economy grew 0.8 percent in the third quarter -- beating the 0.5 percent average for the 19-nation currency bloc -- while unemployment dropped to a nine-year low during the same period.

--With assistance from Alice Baghdjian

To contact the reporters on this story: Maria Tadeo in Madrid at mtadeo@bloomberg.net, Rodrigo Orihuela in Madrid at rorihuela@bloomberg.net.

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Ben Sills, Zoe Schneeweiss

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