Catalonia loses the economic crown and € 6.73 bn (at least)

Catalonia is no more the first economic powerhouse of Spain
Negative expected GDP growth for Catalonia of at least -0.18%

The independent movement in Catalonia has resulted in numerous large corporations moving their legal headquarters to other regions of Spain. The diaspora started months ago but it has accelerated along with the Catalan institutional and democratic crisis.

The most well-known corporations are the two largest banks, Caixabank and Sabadell Bank, and the utility company Gas Natural, but numerous companies from many sectors have also decided to leave Catalonia. Table 1 shows a list of the companies that have been reported by the media.

Catalonia - appendix 1
Companies’ results before taxes in 2016 (unless otherwise stated). Results are in thousands of Euros

Others are expected to follow suit if independence is declared unequivocally (see table 2).

Catalonia - appendix 2
Companies that would move the legal HQ if independence is declared. Results before taxes in 2016 (unless otherwise stated). Results are in thousands of Euros

Many SMEs that are not reported in the media have moved their legal HQ outside Catalonia. According to the Association of Property and Mercantile Registers (Colegio de Registradores), at least 700 companies have moved their legal HQs away of Catalonia since October 2.

The consolidated profit and loss result (before taxes) of a company is a measure of wealth creation in the region, so if a company leaves Catalonia the financial result is allocated to the region where the new legal HQ is (we assume that the legal HQ has the same address as the fiscal’s; this is a minor detail since corporate taxes are paid at national level). The actual calculation of the regional GDP is of course a complex calculation beyond the scope of this note, but the general reasoning of this exercise is correct (confirmed by the European Commission).

Using the latest available information, Catalonia has lost a minimum of € 6.73 bn in favour of other regions (mostly Comunitat Valenciana and Comunidad de Madrid but also Aragón, Galicia, Andalucía, La Rioja, Comunidad Floral de Navarra, and País Vasco).

Because of this run, we estimate that the contribution of Catalonia to Spain has decreased from 19.025% to 18.421%, or a decrease of the regional GDP of 60.5 basis points. If the corporations that consider leaving are incorporated in the calculation, the loss in Catalan GDP will be a minimum of € 7.09 bn, or a minimum decrease of the regional GDP of 63.7 basis points.

The benefited regions would increase their contribution in the national economy. The Comunitat Valenciana is estimated to contribute 9.673% up from 9.434%, or an increase of 23.9 basis points. Madrid is estimated to contribute 19.288% up from 18.926%, or an increase of 36.2 basis points. Madrid now holds the crown of the economic powerhouse of the country.

The change may be small but it has major consequences in the GDP growth forecasts for Catalonia. As shown in table 3, € 6.73 bn is 3.18 % of Catalan GDP in 2016. Since the current forecasts are around 3%, it is therefore estimated that Catalonia is experiencing negative growth of -0.18% if we consider the changes in the legal HQs only. This dovetails with the declarations of the Vice President Soraya Saenz de Santamaría in a recent press conference. Note that the GDP growth of Spain is not affected by this (though it may be affected by a decrease in the economic activity in Catalonia).

Catalonia - appendix 3
Estimated effects in the regional accounts (thousands of Euros)

Four caveats apply. First, if the value added to the regional economy would be in terms of the consolidated profit and loss result after taxes, the transfer of € 6.73 bn from Catalonia to other regions would need to be multiplied by 0.7 (the corporate tax is 30%), which leads to a transfer of € 4.71 bn, or 42.3 basis points. The conclusion that Madrid becomes the first economic powerhouse of the country remains. Using the consolidated profit and loss result after taxes raises the question of where the 30% of value creation goes (from a regional perspective).

Second, cross shareholding is not considered. For instance, Criteria Caixa owns 45.32% of CaixaBank and 22.3% of Abertis. Or 49.92% of SegurCaixa Adeslas is owned by CaixaBank.

Third, this analysis uses the 2016 regional account (publicly available in the Spanish Statistical Institute). This is the latest available. Likewise, the latest consolidated income statements of the companies are from 2016. They are obtained either from the annual reports, from press releases, or from the official company register. In the latter case, the income statements are sometimes from 2015 (and in one case from 2014). This is often the case of non-financial corporations with shares that are not traded in the secondary market. The effect in the current regional GDP and the companies’ results in 2017 is unknown to date – we need to wait to spring 2018 – but it is reasonable to expect it to be qualitatively similar.

Fourth, the effect on the GDP of the decrease in tourism (hotel, cruises, restaurants, etc), cancellation of professional events (conferences, workshops, etc), and investments is not considered. If this information would be observable, the loss in the Catalan GDP would be larger. Indeed, according to Exceltur – and association of 23 leading Spanish tourist groups – Catalonia has lost at least € 1.2 bn in tourist income since the beginning of October, decreasing the regional GDP further to -0.74%. Note that the loss in income from tourism is not a transfer to another region (unless tourist decide to go elsewhere in Spain), which translates in a decrease in the GDP for the country, in line with the updated forecasts of the Government.

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