In 2007, GDP growth averaged 3.8%, the result of some easing in domestic demand and an improvement in the contribution of net external demand to output growth. Against this background, the slowing trajectory on which the Spanish economy embarked during 2007 was consistent with the tailing off of some of the impulses behind the buoyancy of spending in previous years, and with the maturing of the business cycle. Undoubtedly, the raising of interest rates by the ECB – from end-2005 to June 2007 – and the increasingly subdued rises in house prices began to temper consumption and residential investment decisions as early as 2006. This gradual loss of momentum in domestic demand continued in 2007, but  BIS Review 44/2008  1  was not reflected on a similar scale by GDP, owing to the offsetting effect of net external demand. Adding to this domestic adjustment dynamic was, from summer 2007, the effect of international financial market instability. This translated into a deterioration in agents' expectations, and made itself felt in some spending components – consumption and, above all, residential investment – as early as late 2007, but more clearly in the opening months of this year. However, the weakening in consumption is based on comparison with the relatively high end2007 figures, with growth close to 3%, held up by the dynamism of disposable income.
I must not fail to mention that, since May, the figures – including those relating to the use of Official Credit Institute credit lines – point to a less sharp contraction in lending to companies, a trend that is all the clearer if, along with bank loans, other channels of corporate financing, such as securities issues, are included. In respect of the initiatives to promote an appropriate flow of credit to SMEs, which are so important throughout the European Union and, of course, in Spain, some of the ideas tabled are rather unrealistic, owing to their technical complexity, to political difficulties or to both. However, certain corrections that can make a positive impact are indeed possible. On the national regulatory front, certain changes have been adopted. Further to Circular 4/2013, the Banco de España has revised the definition of SMEs, adopting the broader criterion recommended by the European Commission; moreover, with the entry into force in late September of the Entrepreneurs’ Law, the discount factor applied to capital consumption envisaged in the new Basel III and European regulations has been introduced early. I would also like to clarify that the contractionary behaviour of business lending at the aggregate level may prove and, indeed, is proving compatible with a reallocation of resources within the sector, meaning that the reduction in credit for some companies runs alongside an increase in credit for those which, in the opinion of credit institutions, are better placed to undertake profitable projects.