A future at the expense of the sovereignty challenge

The Spanish economy had already entered slowing phase before clash of confidence provoked by sovereignty challenge. This is confirmed by foreign trade and domestic demand data for period immediately preceding outbreak of conflict.

During third quarter, exports of goods continued to grow at an intense rate, driven by recovery of eurozone. However, tourism showed signs of exhaustion. On or hand, imports were accelerated, both in euros and in volume. Oil prices only explain part of this result. It also contributes to trendy recovery of purchases abroad, especially of equipment goods. However, a smaller contribution from external sector to growth is expected.

National demand has also given new signs of weakening. During third quarter, sales of large companies made in Spanish market increased half a point less than in previous quarter. The trend is somewhat more pronounced for equipment goods than for consumption. But it highlights braking in sales of vehicles of tourism.

What happens from now on depends to a large extent on persistence of clash of confidence generated by conflict in Catalonia. Markets are beginning to show ir concern. The last placement of Treasury securities has been made at higher interest rates, which implies an increase in cost of debt. The risk premium, which during past week had recovered previous levels to 1-O, has rebounded again. Gradually distance is shortened with Italy, country however more indebted, with banks plagued with irretrievable credits and anemic growth. While at beginning of year Spanish treasury was indebted to lower interest rates in seven-tenths of Italy, differential was halved.

During second quarter, debt of non-financial firms fell by about 10 billion euros over previous quarter, to 100.6% of GDP. Thus, debt ratio, which became 130% of GDP, returns to its level of 2005. However, households increased ir liabilities by 7 billion euros over first quarter. Its debt is 63.6% of GDP, i.e. 20 points less than maximum reached in 2010. These data are consistent with observed trends in household consumption credit, in a sharp increase that compensates for reduction of credit to acquisition of housing

Tensions in financial markets begin to slip into Catalan economy, beyond impact of corporate headquarters leaking. Important investment projects in that community have been paralyzed, and companies have hardened payment facilities.

The most urgent thing is to take away risk of double legality. The financial institutions have achieved this, thanks to displacement of ir headquarters. But business initiatives are not enough. To invest, create jobs and finance activity, actors of economy need a horizon of clear forecast of doubts about legal framework in which y operate.

An action in this regard would also help to maintain favorable conditions for financing of imbalances in public accounts. In recent years, state has placed debt securities on behalf of regional administrations — through regional liquidity Fund —. Thus, FLA has assumed about 70% of total debt of Catalonia, at a reduced cost that would increase significantly in case of double legality.

If legal certainty were restoreed, growth would only suffer a slowdown, bearing in mind that pillars of expansion are maintained. Companies enjoy favorable financial conditions and ir balance sheets are healthy. The increase in employment, although on a downward path, supports household income and consumption, which generates more activity. This is possible because Spanish companies have diversified ir production of goods and services, in line with consumer preferences. A reasonable increase in wages, as well as an agreement around a new strategy of general state budgets, would underpin that virtuous circle.

Growth faces abyss of a prolonged conflict of sovereignty. But, if conflict were to be channelled, economy could surprise.

Raymond Torres is director of Funcas juncture. On Twitter: @RaymondTorres_