At the Banco de España, we have been warning for some time that this pattern should change and be rebalanced so as to be more sustainable over time.
Fortunately, the foundations of the Spanish economy, which is experiencing one of the longest uninterrupted waves of expansion in its history, remain solid. In recent months, we have even seen investment in capital goods picking up.
That is good news and consistent, moreover, with the favourable financial position and profitability of Spanish firms. But certain risk factors exist. They have to do with a loss of external competitiveness already clearly manifest, which arises from a persistent negative inflation differential with the EU average and from a productivity deficit, caused by a growth model that is intensive in terms of the creation of jobs, but not high-skilled ones, and by something of a delay in the introduction of new technologies.
To redress this situation, further structural reforms must be advanced along the lines indicated by the government in its latest plan for reinvigorating the economy. This is a move in the right direction, but is only a first step.
Q To what extent would a possible slowdown of the housing market represent a threat to medium-term growth prospects?
A Construction has, along with domestic consumption, been one of the main drivers of Spanish economic growth in recent years. This has been accompanied by an increase in house prices attributable partly to fundamentals, such as low interest rates and demographic pressure, but also partly to price overvaluation, which is difficult to quantify.
In the past, similar house-price episodes were absorbed gradually and smoothly, which makes it conceivable to think that something similar may occur on this occasion. However, the longer the upward trend persists, the more difficult it will be for an orderly absorption of excess prices to take place.
The main factor of concern would be the financial behaviour of the private sector. Household debt has been growing at a high rate in recent years, due largely to mortgage lending, and it now exceeds the total volume of gross disposable income (although its starting point was from levels much lower than the European average). This means that households are now more vulnerable to a negative trend in interest rates or the labour market.
Nonetheless, it should not be forgotten that the financial position of Spanish households remains sound overall, since their assets have risen in value in parallel with their higher debt.
Q Is the fact that Spanish inflation is above the EU average a concern?
A It is a fact that, practically since the creation of the single currency, Spain has maintained an inflation differential with the euro area of about one percentage point on average. What this sustained inflation differential shows is that there is a lack of flexibility in certain segments of the economy, such as the labour market or the markets for services.
The persistence of this higher inflation rate year after year is a cause for great concern and may ultimately lead to a problem of competitiveness for the Spanish economy. In fact, the loss of export market share seen in 2004, which had not been witnessed since Spanish accession to the EU almost two decades back, indicates that this is not only a potential risk for the future but a problem that is already beginning to be felt.