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Catalonia crisis prompts Spanish central bank to cut 2-year growth forecast

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Catalonia crisis prompts Spanish central bank to cut 2-year growth forecast

Uncertainty surrounding Catalonia's secessionist drive prompted Spain's central bank to trim its growth estimate for 2018 and 2019.

The Banco de España now expects the country's GDP to grow by 2.4% in 2018 and by 2.1% in both 2019 and 2020. The central bank previously projected growth of 2.5% and 2.2%, respectively. It estimated growth for 2017 at 3.1%.

Spain has faced months of political uncertainty stemming from the Catalan regional government's decision to declare independence following a banned referendum. Madrid then imposed direct rule, in the country's worst political crisis since a failed military coup of 1981. Hundreds of companies, including banks, then transferred their legal domicile out of Catalonia.

"The effect of political uncertainty surrounding Catalonia constitutes an additional condition in the evolution of the Spanish economy throughout the time frame under consideration," the central bank said, adding that this was partially offset by improved outlooks for external markets, particularly those within the eurozone.

The central bank also projected a slowdown in inflation in the short term, with the consumer price index growing by 1.5% and 1.4% in 2018 and 2019, respectively, before adding 1.7% in 2020. Domestic demand will continue to underpin output growth while high rates of employment growth observed in recent years are expected to moderate.