Luis M Linde: Presentation of the Bank of Spain’s Annual Report for 2014 Testimony by Mr Luis M Linde, Governor of the Bank of Spain, before the Parliamentary Committee on Economic Affairs and Competitiveness, Madrid, 24 June 2015. *  *  *  Ladies and gentlemen, I appear before this Committee on the occasion of the presentation of the Banco de España Annual Report for 2014. Let me begin by reviewing developments in the Spanish economy, the factors underpinning its recovery and the economic policy challenges of strengthening recovery. I shall then address aspects relating to the start-up of the Banking Union and the situation of, and outlook for, the Spanish banking system. Economic situation and outlook In mid-2013, the Spanish economy initiated a recovery phase that firmed last year and has continued to do so in 2015 to date. In 2014, GDP grew at a rate of 1.4% while employment did so at 1.2%, the first positive figure since the start of the crisis. In its Quarterly Report to be published tomorrow, the Banco de España will present a new set of macroeconomic projections. According to these, the Spanish economy will grow at a rate of 3.1% on average in 2015, an upward revision of 0.3 pp on the projections published in March. On the basis of this change, activity is performing better than projected three months back.
As we have already stated, consumption and investments continue to suffer from low confidence and tight lending terms. Fiscal policy is faced with a high public debt level, which has limited the possibilities for macroeconomic stimulus. On the other hand, the external environment was characterised by ongoing euro-area problems, hence limiting our export growth and making financial markets pursue conservative policies in terms of lending to developing economies. However, 2013 saw positive developments. Financial markets were characterised by improved liquidity and downward interest rates, in response to Bank of Albania's easing monetary policy. Also, introducing new financial agents and instruments has further deepened these markets. The banking system remains solid and well- capitalised, regardless of increase in non-performing loans. The current account deficit has dropped, creating better premises for a sustainable external position of the economy and stable exchange rate. These developments have contributed to maintaining macroeconomic stability. Analysing the specific developments in the second half of 2013, the official data show a slowing economic activity and a sustained downtrend in inflation. Average annual inflation reached 1.5% in the fourth quarter, remaining unchanged from the third quarter. In December, inflation rate edged up to 1.9%, almost entirely due to higher prices of foods, particularly unprocessed foods. Prices of other CPI basket items were generally stable and affected slightly on inflation. From the macroeconomic viewpoint, the low inflation rate was determined by the sluggish aggregate demand, lower imported inflation and subdued inflation trends.