These included the stress testing and recapitalisation of troubled banks; the identification of troubled real estate assets and their transfer to SAREB (Spain’s “bad bank”); and the reform of the savings banks. At the same time, actions and reforms at European level, including monetary policy (longer-term refinancing operations, LTROs, asset purchase programme, APP) and the move towards banking union, have ensured liquidity and strengthened confidence in Europe’s monetary and financial system. Financial reforms were accompanied by a series of reforms to labour and product markets and to the public sector. The 2012 labour market reform gave priority to collective bargaining agreements at firm level over those at sectoral or regional level. Reforms to product markets, including the law on market unity, have sought to reduce regulatory obstacles to firms’ growth, although implementation has been challenging. The Spanish economy has rebalanced as far as “flow” variables are concerned, while “stock” imbalances are gradually correcting. Banks’ asset quality and solvency has substantially improved, as reflected in higher capital ratios and a steadily declining ratio of non-performing loans (NPLs). The NPL ratio of Spanish banks has more than halved from 13.6% in 2013 to 6.4% now and continues to fall steadily. The banking sector has been able to finance growth with new loans while steadily deleveraging as legacy loans mature. Private sector debt has fallen considerably. Deleveraging of firms and households is well under way, with debt having declined by almost one-third since 2012.
Since the beginning of the recovery, the number of people employed in the euro area has risen by 9.2 million. Euro area unemployment declined to 8.1% in August, its lowest level in almost ten years. Consumer spending is being driven by steady growth in households’ real disposable income. Strong labour markets – with increasing job creation and rising wages – boost household income and, in turn, consumer spending. The investment outlook remains solid on the back of robust demand, improving profitability and favourable financing conditions. Since the end of 2014, bank lending rates in the euro area have declined significantly, by around 130 basis points for non-financial corporations and by around 110 basis points for households. Lending rates on very small loans, which can be used as a proxy for loans to small and medium-sized enterprises (SMEs), have fallen by more than 210 basis points. This is encouraging, as SMEs provide two-thirds of total private sector employment in the euro area. Overall, the underlying strength of domestic activity in the euro area continues to support a sustained adjustment in inflation. According to the flash estimates, HICP inflation increased to 2.1% in September, from 2.0% in August. On the basis of the latest oil futures prices, headline inflation is expected to hover around the current level for the rest of the year. Our most recent projections foresee annual headline inflation at 1.7% in 2018 and in each of the two subsequent years.