As I was able to explain to you here before the summer, the change in cycle in Spain had started before the episode of financial turmoil, making itself felt mainly in the real estate sector, which set in train a correction of the excesses that had built up during the long expansionary phase. These excesses had largely arisen owing to the global environment of financial laxity and undervaluation of risk, and to monetary and financial conditions that were particularly accommodative for Spain following EMU membership. These conditions were based on interest rates that held at low levels over a very extensive period and which were conducive to rapid indebtedness by households and by firms, mainly those related to the real estate sector. In any event, the adjustment of the real estate sector began slowly, mirroring the gradualism with which the determinants of residential investment changed. Hence, as the change in monetary policy stance that began in late 2005 progressively passed through to household and corporate borrowing costs and as the overpricing of housing became more patent, the dynamism of the sector eased off. However, this gradual pattern was altered when the international financial crisis raised credit risk premiums across the board, blocked a most significant part of banks' wholesale funding mechanisms and spread uncertainty and mistrust, most particularly in respect of economies subject to real estate adjustments. Against this background, the demand for housing fell off  BIS Review 122/2008  3  drastically, when the production of houses was still at a very high volume.
The far-reaching changes in the Spanish economy in recent decades have equipped it with the wherewithal to overcome this difficult stage and to subsequently resume a path of sustained growth, allowing convergence to continue. But if these factors are to operate, the authorities and all agents must face up to the current circumstances and make the required efforts, and economic policies must prevent any slippage and enable the factors conducive to the resumption of sustained growth to come into play. Naturally, I shall focus today on the diagnosis of the situation of the Spanish economy and on its economic policy implications. But these would both be incomplete without some, albeit brief, reference to the deterioration of the international setting and to the economic outlook in the euro area which, as you know, will determine monetary policy developments. Last year, the growth of the world economy reached 5%. The forecasts available for this year, however, place the figure below 4%, with scarcely any scope for the start of a recovery in 2009. Moreover, any recovery will be moderate, slow and subject to a degree of uncertainty fuelled, among other developments, by a rise in major inflationary pressures in most economies. In my view, there are three basic factors behind this deterioration of the global economic situation. The first is the adverse behaviour of the US economy, weighted down by the continuing decline in its real estate sector, which is depressing household and investor confidence.