But it seems likely there are also incipient positive effects stemming from the structural reforms already implemented, which may be responsible for the high rate of job creation in this phase of the recovery and the rise in productivity. That would show how efforts to heighten incentives for labour market participation, to further market liberalisation and to create an environment conducive to innovation and the development of human capital ultimately bear fruit, highlighting the need for sufficient political resolve to persevere with the course of action embarked upon. At the end of the first half of 2007, the outlook for the euro area is the brightest in recent years. For one thing, domestic demand is expected to retain its current momentum. Investment in particular should continue to benefit from the persistence of propitious financial conditions, the strength of corporate earnings and the soundness of companies’ financial position, while household expenditure should continue expanding thanks to favourable employment developments. For another, exports are expected to continue faring favourably despite the likely easing in world growth. This central scenario faces the downside risk of a bigger-than-expected slowdown in the world economy. But, in contrast, a better performance of the European labour market might raise forecast growth rates. The inflation outlook for 2007 and 2008 suggests the rate of change of the HICP will hold at around 2%, in line with the definition of price stability.
But what is more, household and corporate purchases of financial assets inside and outside Spain increased, the result being that gross financing required by both sets of agents climbed from 35.6% to 44.7% of GDP. Indeed, although household consumption posted a somewhat lower growth rate than in 2005, as disposable income moderated even more, household saving as a proportion of household disposable income continued falling. Given that investment in housing continued to increase at a high rate, household net borrowing rose to 1.5% of GDP. Nonetheless, changes in interest rates and property price levels themselves began to temper the demand for housing, with the volume of transactions easing off and a slowdown in prices. Yet significant underpinnings for the dynamism of housing demand in the medium and long run remain as a result of socio-demographic factors – such as the thrust of immigration, the growing incorporation of women into the labour market and the reduction in the average family size – which will continue to translate into substantial increases in the number of households. These socio-demographic factors, which were not present in the final stages of the previous upturn in this market, will allow activity to stabilise, on this occasion, at higher levels than was the case then. In the new setting of less relaxed financial conditions, Spanish households began to resort less to credit as a means of financing their expenditure.