Output, which grew by 3.4 percent in 1997, has been supported by a solid increase in exports, equipment investment, and, most recently, consumption. A favorable competitive position has stimulated export growth, while declining interest rates, rising disposable incomes, and increased consumer confidence have boosted domestic demand. These developments have been helped by auspicious conditions, but are mainly the result of economic policies aimed squarely at making Spain a founding member of the European Monetary Union. The recovery has been accompanied by a marked decline in inflation and robust employment creation . Inflation fell steadily, from about 5 percent in 1994 to 2 percent in 1997, marking the attainment of nominal convergence with European partners.
Unemployment continues to be concentrated in the young and unskilled population.
The external current account continued its trend improvement and posted a surplus of of a percent of GDP in 1997. Although imports have risen with the cyclical upswing, this has been more than compensated by the rapid expansion of exports and tourism receipts. The favorable current account performance, accompanied by capital account surpluses, led the Bank of Spain's reserves to be reconstituted to levels prevailing prior to 1992, while maintaining the exchange rate within a narrow margin of its central parity. Fiscal consolidation has been firmly aimed at fulfilling the requirements to qualify for EMU participation from the outset. Solid policy implementation in 1996 and 1997, propitious cyclical conditions, and a falling interest bill reduced the general government deficit from 6.6 percent of GDP in 1995 to 2.6 percent in 1997.