Recent developments and outlook for the Spanish economy Turning to the Spanish economy, so far in 2018 the expansionary phase has continued, albeit at a lesser pace than in previous years. Real GDP growth stood at 2.5% year-on-year in the third quarter, following increases equal to or higher than 3% in the three preceding years (see Chart 5). This slowdown in growth, which the Banco de España has been anticipating in recent quarters, is partly in response to the international environment, where developments have been somewhat less positive this year, as I previously described. In any event, the baseline scenario for growth in the Spanish economy in the coming years is consistent, as it is in the 4/14  euro area as a whole, with growth rates running above potential and, therefore, with an increasingly positive output gap. As to consumer prices, the dynamics continue to be greatly affected by the fluctuations in the energy component (see Chart 6). The latest available figures, for October this year, show a year-on-year increase in the overall harmonised index of 2.3%. However, core inflation remains moderate, at around 1%. As from the final stretch of the year, a progressive reduction in the contribution of the energy component is projected, which will tend to be offset by the gradual strengthening in the core component, in step with the foreseeable widening of the positive gap between actual and potential output. Spanish economic activity continues to be underpinned by easy financial conditions.

In order to foster an adequate level of competition, apart from lowering the barriers to entry in some sectors, certain regulations hampering the development of new productive firms will have to be reviewed, either because they provide incentives contrary to the development of business growth or because they hinder the exit from the market of firms with sub-optimal productivity, thereby limiting the proper allocation of productive resources in the Spanish economy. Additionally, enhanced productivity requires improvements in human and technological capital. In this respect, the educational legal framework needs to be strengthened, to eliminate the gap between the educational quality indicators of Spain and other developed 10/14  countries, and the challenges to Spain’s educational and occupational training system posed by globalisation, technological process and task automation need to be addressed without delay. Furthermore, during the crisis the technological capital gap between Spain and its European partners widened due to lower spending on R&D as a proportion of GDP in the public and, particularly, the private sector. In addition to the structural features limiting firms’ innovative ability (in terms of human capital, business capabilities, productive structure, business competition and financing), Spain’s public research system is susceptible to improvement and the budgetary funding of innovation is low. Challenges facing the Spanish banking sector Let me now concentrate on some of the main challenges facing the Spanish banking sector. Despite the significant progress made in recent years in terms of profitability, solvency and liquidity, it still faces some significant challenges, largely shared with other euro area banking systems.