The data available on the Spanish economy suggest that, during the first quarter of 2015, the expansionary trajectory observed in 2014 has stepped up. GDP is estimated to have increased by 0.8% in quarter-on-quarter terms, which would place the year-on-year rate of change for the first quarter at 2.5%, a higher level than expected. The recovery in the Spanish economy this year and in 2016 will be underpinned by the strength of private domestic demand and by stronger exports. Moreover, the decline in the tax burden, following the reform that came into force in January, and the monetary policy measures recently adopted by the ECB – including most notably the asset purchase programmes – will also support growth. The projections published by the Banco de España  BIS central bankers’ speeches  1  in its Economic Bulletin two weeks ago point to GDP growth of 2.8% this year, followed by similar growth in 2016, at a rate of 2.7%. As to the labour market, the projections of the Banco de España are for growth in employment of 2.7% this year and 2.6% in 2016. The increase in employment will enable the unemployment rate to continue shrinking at an even greater pace than in 2014, to stand at around 20% of the labour force in the fourth quarter of 2016.
These strains in household finances from suddenly excessive debt service burdens are met by households in a variety of ways: through default, foreclosures, and bankruptcy, or renegotiation of the terms of repayment, but also through continued higher principal and interest payments accompanied by much lower consumption than the household had previously planned. As we see in Chart 1 (Employment declined dramatically) job losses in the recent recession were extremely large and prolonged, a problem that resulted, in part, in significant delinquencies in debt repayment. Furthermore, the significant decline in house values imposed a much stricter limit on how much households could borrow if they needed, for example, to adjust to the effects of a temporary loss of income. Recent economic research has examined how the macroeconomy is affected when households suddenly experience reduced borrowing capacity. Eggertsson and Krugman consider the case of households that have borrowed up to some limit and now see their debt limit reduced; these households suddenly find themselves over-indebted and are forced to cut spending.1 If the required cuts in spending are large enough, then even a very active monetary policy will be unable to offset them completely. Other research has also suggested similar mechanisms.