By contrast, in terms of the leverage ratio, that is, when banks’ assets are not risk-weighted, the relative position of the Spanish banking system is more favourable, standing somewhat above the European average and above that of the main European banking systems. Spanish bank profitability since the start of the crisis The profitability of the Spanish banking system contracted sharply during the last economic crisis and more severely than in other jurisdictions: in 2012 return on equity reached a negative level of -21% and return on assets a negative level of -1.2%, according to the consolidated statement information which reflect not only business in Spain but also international exposures. The main determinant of this performance was the increase in loan losses associated with the significant increase in non-performing loans, in particular in construction and the real estate sector to which banks were over-exposed. Despite the drop in aggregate profit levels in the first half of this year, in recent years the profitability of the Spanish banking system has tended to recover, essentially underpinned by the decline in impairment losses which reflects the improvement in the quality of the credit portfolio. The reduction in non-productive assets – non-performing loans and foreclosed assets – has played a fundamental part. Specifically, the ratio of non-performing loans to the resident private sector in Spain has fallen from 14% in December 2013 to 5.3% in June 2019, and the volume of foreclosed assets has decreased from almost € billion in December 2013 to € billion in June 2019.

By country, the decline in activity in the German economy and the stagnation in Italy were notable. Furthermore, the available indicators suggest that the weakness of economic activity in the euro area persisted in the third quarter of the year. Thus, the indicators relating to trade and industrial activity (industrial production, export orders, manufacturing confidence and industrial production expectations) continued to deteriorate. Also, certain survey indicators of activity and employment in services showed a downturn, which may indicate that the weakness is beginning to spread to these activities. The slowdown in employment, along 3/13  with the gradual decline in consumer confidence in the third quarter, points to more modest growth in private consumption, which until now has been the main driver of growth. In this context, the ECB published its macroeconomic projections for the euro area as a whole last week. Projected GDP growth was revised downwards, especially for 2020. Specifically, growth is now projected to be 1.1% in 2019 and 1.2% in 2020, in both cases lower rates than were projected in June. In the medium term, a recovery in activity is expected, underpinned by favourable financial conditions and the slightly expansionary fiscal policy stance, assuming that the political and trade uncertainty gradually dissipates. Notwithstanding this downward revision to the macroeconomic projections, the ECB’s Governing Council stressed that there remain important downside risks to the central scenario, arising mainly from the possibility of a no-deal Brexit and a possible escalation of trade tensions. Inflation in the euro area remains at low levels.