Bank of Spain warns Catalonia faces recession risk

Spain's central bank warned Thursday that Catalonia risks recession if the crisis over its secession drive continues.

A "severe and prolonged" crisis would plunge the Catalan economy into recession "for the most part" of the period between the end of 2017 and 2019, the Bank of Spain said in its latest economic bulletin.

Such a downturn would cause an accumulated decrease of 2.5 percentage points in Spain's gross domestic product (GDP) during this period, it added.

Under a more optimistic scenario, with only a temporary period of uncertainty in the fourth quarter of 2017 due to the Catalan crisis, the bank predicts Spain's economic growth would be reduced by 0.3 percentage points during this period.

But the bank left its growth forecast for Spain, the euro zone's fourth largest economy, unchanged for this year and the next. It sees the economy expanding by 3.1 percent in 2017 and by 2.5 percent in 2018.

Spain central government is maintaining its 3.1 percent growth forecast for 2017, but it has already downgraded its outlook for 2018 to 2.3 percent from 2.6 percent due to "uncertainty" sparked by the situation in Catalonia.

"In the case of families, a loss of confidence regarding the future could cause them to dedicate a bigger percentage of their income to savings as a precaution," the central bank said.

"In the same way, in a context of great uncertainty companies could put off carrying out new investments," it added.

Uncertainty about Catalonia's future has prompted almost 2,000 banks, multinationals and mid-size companies to move their legal headquarters outside the region.

Catalonia, a region of 7.5 million people with is own distinct language and culture in the area bordering France, generates about one-fifth of Spain's economic output.

As a separate country its gross domestic product would be about as big as that of Portugal or Finland.

Spain is one of the fastest growing countries in the euro zone, recording an expansion of 3.4 percent in 2015 and 3.3 percent in 2016, double the average of the member states of the single currency bloc.