Further, the major advantage for the Spanish economy that maintaining a comparatively low public debt/GDP ratio entails should be preserved. Watchfulness will also be needed to prevent current expenditure overruns that reduce the leeway available to undertake public investment programmes and fulfil other productive expenditure commitments made in the Budget. We should not forget that when public overspending occurs, the subsequent adjustment usually falls on productive spending and, most particularly, on public investment, with adverse consequences for long-term growth potential. In the current circumstances, moreover, having some scope to carry out the infrastructure investment plans under way is crucial for smoothing the adjustment in the construction sector. The State Budget should, in my view, comply with these premises. But the regional and local governments also have a major role to play in this task, since they account for a most significant portion of public spending – and, in particular, of public investment – and are facing a phase of rapid decline in their revenue-raising capacity. Elsewhere, a worrying aspect of the scenario I have described is the speed and intensity of the response by employment, which is amplifying the effect of the correction of the housing sector on the rest of the economy. This reveals the persistence of inadequacies in the workings of factor and product markets that mean that the weight of the adjustment falls on the level of employment, hindering the necessary reallocation of productive factors across sectors.
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.