Spain to face possible slowdown in the economy and fiscal slippage - HSBC

Fabio Balboni, European Economist at HSBC, suggests that they see a high risk of a prolonged situation of uncertainty, at least until any regional elections and possibly after for Spanish economy.

Key Quotes

“The economic implications are difficult to assess at this stage, and stem mainly from two sources: the direct effect on Catalonia, which accounts for about 20% of Spain's GDP and has been one of its fastest growing regions, and the broader implications for Spain. Prolonged uncertainty could act as a drag on consumer and investor confidence, and possibly also tourism, one of the key drivers of the Spanish recovery. A recent survey by the Catalan association of SMEs (Pimec) said that 10% of its members had stopped investing, and another 9% were thinking of doing so in the near term (El País, 20 October).”

“The Spanish independent fiscal authority Airef warned on 18 October that the government's estimate in terms of possible GDP impact – a reduction of 0.3-0.4ppt next year – "seemed to contemplate a scenario where the constitutional crisis will be of relatively short duration", warning that growth could be up to 1.2ppt lower if the crisis was to extend until next year, which does not seem a too far-fetched scenario. According to Airef, this could also mean a higher fiscal deficit by between 0.2-0.5 % of GDP, possibly higher in our view given Catalonia is one of the largest net contributors to the central government budget (net transfers are around EUR10bn – almost 1% of the Spanish GDP – each year) making it harder to meet next year's EU target (2.2% of GDP) and to put Spain's high-debt-to-GDP ratio (close to 100% of GDP) on a stable downward trajectory.”