In this respect, it should further be borne in mind that the maintenance over a prolonged period of time of a strong expansion in domestic demand, driven by substantially generous monetary and financial conditions, entails pressures which, if they build up, may emerge precisely when some of the factors upholding growth begin to show signs of petering out. The foregoing comments indicate that the favourable growth prospects for the coming years cannot be taken as guaranteed over the longer term. The Banco de España has been signalling the fact that the prevailing growth pattern harbours certain risks that may emerge in the form of a deterioration in competitiveness and financial imbalances in the households and non-financial corporations sector. Although the trajectory of the Spanish economy has not yet been hampered by the emergence of these risks, any future deterioration could impair further progress in real convergence. Competitiveness can be undermined on several fronts. The first of these is the maintenance of a persistent inflation differential with the euro area. This differential is partly related to the fact the Spanish economy is ahead in the cycle, but it has also to do with the presence of elements of inertia in wage and price formation in Spain associated with structural shortcomings in certain markets for factors, goods and services. Another significant front is limited productivity growth, which is not only lower than in the United States but also than in most of the European countries.
It is well known that the strong growth of household and corporate demand has been accompanied by a notable rise in borrowing and in their debt ratios. Although this has not led to any deterioration in the financial position of these sectors (because their assets have also risen in value) or to rises of the same magnitude in their debt burden (thanks to lower interest rates), their higher indebtedness has made them more vulnerable to adverse changes in economic and financial conditions. Household debt cannot grow indefinitely at the rapid pace of recent years. The higher indebtedness and the increasing weight of floating rate loans, along with the rising share of equities and real estate in households’ asset portfolios, have made their spending decisions more sensitive to interest rate and asset price movements, in a situation complicated by the limited disposable savings remaining after debt service. The property market is particularly significant in this respect because most household indebtedness is linked to house purchases. Although the supply of housing has responded fairly flexibly to the increased demand and the price trajectory has not departed substantially from the pattern seen in previous upturns, a certain degree of overvaluation of these assets is detectable in Spain. This overshoot, which was not corrected in 2003, makes it particularly necessary for buyers and sellers in this market to act cautiously. A gradual absorption of the overvaluation would establish a frarmework of greater financial stability for households and forestall interference in their consumption decisions.