Is Catalonia feeling the impact of the trade war first?

BarcelonaThe Catalan economy closed the second quarter of the year with a growth rate lower than the Spanish average, a situation that has not occurred since the summer of 2023. The difference between the growth rates of Catalonia and Spain has been minimal, but the data highlight the differences in the production model and, above all, in the export model.

According to the latest data from Idescat, the statistical agency of the Generalitat (Catalan Government), and the National Institute of Statistics (INE), Catalonia's gross domestic product (GDP, the indicator that measures the size of an economy) increased by 2.7% in the second quarter compared to the same period last year, one-tenth of a percentage point more than the recorded growth rate. In other words, a very small—almost anecdotal—difference in favor of the Spanish economy after months in which Catalan growth had normally exceeded the Spanish average by three or four tenths of a percentage point.

However, it should be noted that the evolution of Catalan and Spanish GDPs tend to go hand in hand, for two reasons. The first is that Catalonia is not an independent state, but rather shares government, fiscal policy, monetary policy, and laws with the rest of the autonomous communities, in addition to being fully integrated into the Spanish market for centuries. The second is purely mathematical and is directly related to the first. Precisely because Catalonia is part of Spain, the evolution of Catalan GDP affects that of Spanish GDP, because Catalonia is a part of Spain. More specifically, Catalan GDP represents almost a fifth of the state.

In fact, if you look at the attached graph, you can see that since 2019, the evolution of both economies has been almost identical. The decline during 2020, the hardest year of the pandemic, was somewhat more pronounced in Catalonia, which had already slowed its growth in 2019: Catalan GDP took the hit after two consecutive quarters of decline; that is, a technical recession, something that did not occur in Spain as a whole.

However, once the hardest blow of COVID had passed, the Catalan economy regained momentum and caught up with the Spanish economy in terms of growth. At the end of the second quarter of this year, Spanish GDP had grown 10% compared to the first quarter of 2019, while Catalan GDP had grown 9.8%. Very similar figures.

External Dependence

In recent years, now that the pandemic is over, Catalonia has taken advantage of the tailwinds coming from abroad. Although it represents just over 19% of Spain's GDP and 16% of the state's population, Catalonia has a notably more open economy than Spain as a whole, as evidenced by the fact that Catalan exports of goods account for approximately 26% of the state's total. This is also due to the fact that industry is more important in Catalonia than in the rest of the country.

In 2022, with the Russian invasion of Ukraine, much of Europe suffered the shock caused by energy dependence on Moscow. Spain emerged unscathed thanks to its gas connections with Algeria, which limited the impact of the war on both the Catalan and Spanish economies. Furthermore, also in relation to the foreign sector, in 2019, 11.6% of economic activity in Catalonia came directly or indirectly from tourism—two-tenths less than the Spanish average, according to a study by the University of Barcelona—which explains the growth in recent years and casts doubt on the future of both economies.

Now, however, it seems that the slowdown is a fact and that Catalonia and Spain are destined to grow less. For the time being, it seems that the former will suffer somewhat more from the consequences of the current economic situation, marked by the continuation of the war in Ukraine (in addition to the conflict in Gaza and instability in the Middle East, with the resulting volatility in energy markets) and, above all, the trade war launched by the president of the United States, one of our European allies.

In this regard, the Catalan GDP data published this past Monday by Idescat already indicate a drop in goods exports. This drop is directly due to the impact of Catalan companies' sales in the US, but this fact is by no means the main reason, since the North American market does not even represent 5% of total Catalan exports. "Sectors such as automotive, chemicals, and industrial goods" send a significant proportion of their production to the US, but the trading partners are mainly within the European Union, notes Joan Ramon Rovira, head of the research department at the Barcelona Chamber of Commerce.

Therefore, the most notable effect of Trump's tariffs is how they impact countries such as Germany, France, and Italy, which export much more to the United States proportionally and to which many Catalan companies are suppliers. "In Catalonia, we're suffering more from Trump" than the rest of the country, explains Albert Carreras, director of the School of International Trade (ESCI) at Pompeu Fabra University. Catalonia has a more open economy than Spain as a whole, both directly with the US (the weight of exports to this country is greater in Catalonia than in the rest of the country) and, above all, with the EU states that are most dependent on the US market.

General slowdown

The Catalan and Spanish economies have maintained a growth model with few changes for decades, although some indicators suggest that now it could be evolvingUntil now, economic activity has been concentrated in labor-intensive sectors with rather low wages and lower productivity than the economies of northern and central Europe, although there are industrial sectors where productivity is higher. Carreras cites as an example the "agro-industrial production mix," made up of a strong agri-food industry—especially the meat sector—and an industry producing industrial goods such as machinery, automotive components, and the chemical and pharmaceutical sectors.

In the case of services, the situation is similar: tourism and sectors such as commerce and hospitality continue to push the boundaries. "The tourism model hasn't changed; we're still doing the same thing," Carreras asserts.

In other words, the post-COVID economy has grown in Spain and Catalonia through the creation of low-skilled jobs in low-value-added sectors. This explains why the bulk of these jobs are filled by newcomers, since, on average, citizens born in Catalonia have educational levels that are too high for these types of jobs. However, the economic recovery cycle following COVID is currently peaking and is shifting toward a situation of uncertainty caused by international turmoil, with less tourism and less economic growth among European partners.

In this context, the "vulnerabilities" of the Catalan economy will be more exposed, says Carreras. These include the heavy dependence on the foreign sector in the industrial and tourism sectors, low productivity, and the strong externalities caused by the model, which lead to overcrowding in tourism, rising housing prices, and territorial pollution (in the case of the meat industry and others).