Robust growth is projected over the next two years, driven by very supportive financial conditions, the depreciation of the euro, lower oil prices and strengthening trading partner growth. The fiscal stance is assumed to be mildly contractionary. Private consumption growth will be supported by rising employment and incomes, household tax cuts, and lower fuel prices and interest rates. Export growth will be underpinned by cost competitiveness gains, including from the depreciation of the euro, and stronger growth in Europe. Persistent slack will keep inflation low.
The government should continue to ensure the reduction in the fiscal deficit in order to put public debt on a downward path. Structural reforms to make it easier to start and expand a business and improve innovation are key to moving towards a knowledge-based economy and ensuring strong inclusive growth and job creation. High unemployment, which has pushed up income inequality, is a key concern. Dealing with it will require greater efforts to improve both job search assistance and training options for the unemployed, many of whom are poorly skilled.
The collapse of the property bubble and the recession led to a fall in total investment from a historical peak of 31% of GDP in 2007 to a trough of 18.5% of GDP in 2013, around 5 percentage points below its long-run average. Machinery and transport equipment investment has been growing around 15% per annum, helping to boost medium-term prospects. The bubble left an excess of housing in coastal resorts and satellite towns. It also contributed to high corporate leverage but this is now declining. Overall infrastructure quality is high, but the bubble resulted in excessive investment in regional airports. Continued investment in cross-border electricity transmission would increase energy market efficiency in Spain and the EU. Harmonising the price of greenhouse gas emissions across sources using taxes and fees would promote efficient investment in emissions reduction technologies.