CATALONIAN ECONOMIC AND POLITICAL OUTLOOK

Despite all the uncertainty generated in Catalonia by the so called “process” geared by those political parties in favor of independence, the Catalonian economy has managed to go through the unstable political scenario and grew by a robust 3.3% in 2017, above the Spanish average of 3.1%.

Despite the political uncertainty developed during a material part of the third and fourth quarters of 2017, Catalonia retained its position as Spain's leading regional economy in 2017. With a GDP of 223,139.2 million euros, it represented 19.2% of the national total, that is, one tenth more than in 2016.

The events that have taken place since 1 October 2017 (date of the illegal referendum for independence) there were material developments thaT impacted on investments, trade, vehicle registrations, tourism and transfer of company headquarters out of Cataluña. However, part of this effect has been onlytemporary and the economic activity in Catalonia continues to gather  momentum even faster than in the other autonomous regions.

The figures published by the Department of Commerce show that Catalonian industrial exports have played a significant role in this expansion of the economy, to the extent that during 2017 Catalonia was the Region that contributed most to the record growth of foreign sales, second only to Galicia.

In short, the Catalan industrial sector is competitive and in spite of political uncertainty its figures have skyrocketed in a context of expanding global trade.

Other data, however, look frightening: according to the Treasury Office, more than 1,000 companies, some of which are banner companies such as Allianz, Zurich, Banco de Sabadell, the Cava producer Codorniú, Planeta (the largest Catalonian publisher), Catalana Occidente (insurance company), e-Dreams (one of the largest European on line travel agencies), Abertis (the highway concessionaire) and others, that moved their fiscal address out of Cataluña, a development that may have no immediate consequence beyond the psychological impact on the economic forecasts but may end up havingmedium and long-term consequences for investments  and the ability of Cataluña to collect its own taxes.

Estimates indicate that the outbound flow of companies may be preventing Cataluña – up to date - from invoicing some yearly 40 billion Euros in sales.

According to the figures available, in October 2017, (the month of the illegal referendum on

independence) the number of travelers, overnight stays and the prices of touristic services fell. In the same month, there was also a collapse in retail trade, vehicle and real estate sales. And according to the Bank of Spain, 31.4 billion in deposits fled away from Catalonia in the last quarter of 2017, an unprecedented fall of 17%.

Bodies such as the Bank of Spain, the Fiscal Authorities, the IMF or the OECD then warned of the

economic risks involved in the secessionist adventure. The government even lowered by three tenths the Spanish national growth forecast reported to Brussels for 2018.

But during the first quarter of 2018, all that catastrophic data partly faded away. The economic

indicators handled by the Central Government as well as the analysts, detect a return to a certain

normality, after months of maximum tension in Catalonia. All in all, Catalonia's growth in 2017 was two tenths lower than that of 2016, where it reached a peak rate of 3.5%. Like the Spanish economy as a whole, it slowed down by two tenths in 2017. And according to data from IDESCAT, the Catalan statistical agency, this is explained by the decline in investment on the one part and the stagnation in the services sector and in the impact of a lower household consumption on the other.

In spite of such apparent return to normality, the analysts of leading banks estimated early in the year that activity in Catalonia would only increase by 0.64% in the first quarter of 2018 and 0.54% in the second quarter, that is, below the 0.77% and 0.85% forecast for the whole of Spain for those periods, respectively. In other words, the slowdown was not being as abrupt as it was initially assessed, but something was really happening.

For its part, BBVA Research forecasts indicate that "The structure of growth in Catalonia has been very atypical. On the one hand, domestic demand has been quite affected, with consumption growing by 0% according to IDESCAT. On the other hand, industrial production and exports have shown a spectacular evolution. In general, companies have perceived the shock as temporary and employment has not felt the impact. Furthermore, what we can see is that companies have intended to set off the fall in demand by lowering prices, which has helped to normalize the activity".

Being an annual figure, Catalonia's growth rate in 2017 does not yet reflect the full slowdown

experienced in the last quarter. In other words, analysts believe that the Catalan GDP may still suffer during the first half of 2018. According to the experts, in the long term, the mere probability of a future secession may gradually halt numerous investments, a phenomenon that has already occurred in Quebec, where after the referendums the region has been gradually losing weight in the Canadian economy.

As far as the entrepreneurial scenario is concerned, Mr. Juan Rossell, the President of CEOE (the

Spanish Confederation of Entrepreneurial Organizations) has acknowledged that the current daily

activity of companies is "dynamic". Data for the last few months have been positive; in particular in

sectors such as tourism, consumption and even industrial consumption. However, Mr. Rossell considers that international companies have still not made final decisions as to their future in Cataluña, which may be decisive in the medium term. However, it would seem that their investment decisions for the coming years, are - allegedly - systematically discarding Catalonia.

The future of Cataluña is earmarked to the future of the European Union in spite of the unrealistic

opinions coming from the secessionists that Cataluña will be much better off if they separate from Spain. Such a view fails to consider that Spain is the main trade partner of Cataluña, pouring into Cataluña some 22% of the national industrial national business figure amounting to a total of 570.537 million Euros, out of which the figures available indicate that some 129.921 million Euros corresponded to Cataluña.

But the short-term outlook is not that pessimistic.

By sector, estimates point to upward year-on-year growth in the services sector and a certain slowdown in the growth of the industrial sector, in contrast to the strong pull of the previous quarter.

Construction remained materially stable , while the agricultural and fisheries sectors continued to show negative results, but less than in previous quarters.

On a more detailed note, construction maintained the growth of the previous quarter at 6.4%, growth rates that had not been known since 2006. In this case, the pull corresponded to the residential activity, (specifically to housing), although in the course of this quarter the improvement of public works was added thanks to an increase in the number of bids called by the different administrations.

Industry growth slowed from 6.4% in the last quarter of 2017 to 5.1% in the first three months of 2018. Economists noted that the increase in the fourth quarter of 2017 was the highest in the past year and stressed that the 5.1% recorded up to March is above the annual average of 2017. The services sector accelerated its year-on-year growth in the first quarter to 2.7%.

The data available for the first three months of 2018 also show a recovery in the influx of foreign

tourism, after the negative results of the December 2017, with a significant year-on-year increase in

tourism expenditure of 10.4% and 3.4% in the number of visitors.

In Spain as a whole, according to INE estimates, the economy grew by 0.7% between January and

March compared to the previous quarter, the same pace as in the previous two quarters. However, the year-on-year variation was 2.9%, that is, two tenths below the variation recorded in the three preceding quarters; and this was the first time in 11 consecutive quarters that Spanish GDP grew below 3%.

The Political Scenario

As a result of the political turmoil, the legislative activity has been practically halted in many areas.

While the Catalonian Parliament has traditionally not been “hyperactive” it has not even fulfilled its

own targets. Former President Puigdemont assured that the Parliament would pass 45 laws in the 18 months of the legislature and the result has been far below: almost 50%. Some 23 laws (18 in 2017 and five in 2016) were passed, including the controversial reform of the regulations on trade and climate change, as reported on the website of the Catalonian Parliament. And at least three of the most publicized laws have not been the result of the work of Parliament members but from the public initiative: those that refer to the guaranteed minimum income, the regulation of the cannabis clubs and the annulment of Franco's trials in Catalonia.

The opposition blames the independency process for this lack of legislative activity, but the truth is that the Parliament's lack of action is not limited to this short term, as all the last few years have been “slow motion”: The record for legislative inactivity was set in 2013, when only one law was passed (on the tax rate applicable to the transfer of immovable property).

And the figures confirm this impression. In the first two years of Artur Mas's mandate (2011-2012), in which he basically devoted himself to produce social cuts in line with hte parliamentary alliance with the Popular Party, 21 laws were passed, and in the legislature that coincided with the onset  of the(independence) 'process' (2012-2015) 47 laws were passed but less than half of those passed in the second tripartite government period (2007-2010), which passed 97 laws in four

years.

If we compare the legislative activity of the Parliament with that of the National House of Representatives (Congreso de los Diputados), the lower output of the Catalonian Parliament is also

evident. In the 10th legislature (2011-2015), the “Cortes” passed 244 laws, although in this case it must be borne in mind that the Popular Party enjoyed an absolute majority and could legislate without opposition. But in the course of the two previous legislatures, the IX (2008-2011) and the VIII (2004-2008), with minority governments under José Luis Rodríguez Zapatero, considerable numbers were also reached: 197 and 219 laws, respectively.

As a result it can be said that a number of actions of upmost interest for the Catalonian population

(including, among others, the much needed regulation of the urban property lease market) are still pending, waiting for better political times.

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