The participation rate has stagnated in recent months, and is still below its pre-pandemic levels, lagging behind other economies, as we show in one of the boxes in this Report. This is mainly linked to lags in the recovery of employment among the under-25 and over-54 age groups, in a context in which women participation rates continue to be well below those of men (49.9% and 70.1%, respectively). According to INE publications, among the most important reasons for not participating in the labor market are family and personal responsibilities, studying, and retirement. Gross fixed capital formation (GFCF) continued to decline, in a scenario where uncertainty is high and business confidence keeps deteriorating. Seasonally adjusted, GFCF fell by 1% between the first and second quarters, after a 7% decline in the first quarter. In any case, this performance was somewhat better than expected, influenced by some large-scale investment projects. By components, the sharp drop in machinery and equipment stood out. Business confidence (IMCE) continued the downward trend it has followed since the beginning of the year, especially in the construction sector. This coincides with levels of economic uncertainty (Depuc) that remain high by historical standards, more restrictive credit access conditions and high long-term interest rates (figure 6). Despite lower consumption and weaker investment, the current-account deficit — accumulated over twelve months— increased in the second quarter, still reflecting the magnitude of the 2021 imbalances, which were subsequently compounded by a deterioration in the terms of trade and high transportation costs.

Going forward, a deteriorating labor market would affect the sector, particularly those households with less financial capacity to face an income shock. Meanwhile, a scenario of higher rates would have a smaller impact on households' outstanding debts —as they are granted mostly at a fixed rate and long term— as opposed to new borrowing for buying a new home or refurbishing one. All in all, the aggregate impact of this scenario on the sector is greater if the macroeconomic effects of an in interest rate rise are factored in. The banking system's financial indicators remain healthy, although capitalization is lagging behind international standards (figure 14). Banking stabilized profitability and solvency indicators, keeping liquid and currency mismatches within bounds, and without making significant changes in its dividend policies. In terms of credit risk, quality has deteriorated in the individual evaluation of the commercial portfolio, which has been covered with increased collateral. Although this strategy allows reducing the idiosyncratic risk of each bank individually, it causes vulnerability of the banking industry to systemic events that simultaneously reduce the payment capacity of enterprises and erode collateral value. This is a risk factor that must be monitored considering that 45% of total bank lending belongs to this category. Stress tests indicate that an adverse scenario of a slight but prolonged fall in activity would pose a risk to banks comparable to one of a more severe scenario but with a faster recovery.