May 22, 2018 / 11:10 AM / in a month

Bank of Spain sees Catalonia as economy's main domestic risk

(Reuters) - The political situation in Catalonia is one of the main domestic risks to the economy due to uncertainty over the development of tension between Barcelona and Madrid, the Bank of Spain said on Tuesday.

While a significant rise in economic uncertainty in the last few months of 2017 due to polictial tensions, during which thousands of companies moved their legal headquarters out of the region, was transitory, concerns remain, it said.

“In the short and medium term, the final effect of this risk element on the whole of the economy will depend on the magnitude and persistence of this episode of political uncertainty,” the bank said in its annual report.

In October, Madrid was forced to take control of Catalonia, worth a fifth of total economic output, after a unilateral declaration of independence, considered illegal in Spain’s constitution.

Since a regional election in December in which pro-secession groups won a small majority, the political leadership has been unable to pick a government without clashing with the country’s legal system.

The central bank also noted that a weaker tourist sector - which accounts for around 11 percent of Spanish GDP - a strengthening euro and oil price rises point to more modest growth expecatations.

The Bank of Spain sees the economy expanding 2.7 percent this year after 3.1 percent in 2017.

In the medium term, the bank noted it saw potential growth at below 1.5 percent with structural limits including high unemployment, an aging population, reduced productivity and limited competitiveness.

Reporting by Paul Day; paul.e.day@thomsonreuters.com

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