miguel fernandez ordonez : economic forecasts, measures to exit the crisis, and the spanish financial system opening address by mr miguel fernandez ordonez, governor of the bank of spain, of the cinco dias series of conferences, madrid, 31 march 2009. * * * thank you very much for calling on me to inaugurate this series of conferences at a time burdened with challenges for economic analysis and economic policy. given the scope of this conference, i shall address three matters of interest to the media : economic forecasts, the measures needed to exit the crisis and the current situation of the spanish financial system. economic forecasting has seen better days. over the past 20 years, all institutions have been projecting high growth rates for the world economy in view of the benefits arising from increasingly integrated economic systems anchored firmly on free - market principles. nobody could have conceived systemic market failings on a global scale such as those we are currently witnessing, and which are prompting a spectacular collapse in output and world trade. and right now, in the thick of the crisis, it is still difficult to prepare macroeconomic projections. but it is precisely in these circumstances when we most need such projections which, while they may well contain a large margin of error, are of use to us for assessing the juncture at which economies stand. more than the specific figures in the projections, what matters most is knowing the direction and intensity of the forces driving current dynamics, so we may better identify and gauge the pressing measures needed. the forecasts published by international institutions in recent weeks show that we face a severe global recession. earlier this month, on 13 march, the international monetary fund published for the first time a negative growth rate for the world economy of between 0. 5 and 1 pp for this year. a moderate recovery is estimated for 2010, but one still far below what we thought the growth potential trajectory was. unfortunately, for several months now, each new projection has habitually entailed a notable downward correction on the projection immediately preceding it. it would therefore not be unusual, once the imf updates its world macroeconomic outlook in a few weeks, that the resulting forecasts should have worsened on those published this month. the outlook for the euro area does not differ substantially from what the imf anticipates for the developed economies. early in the month the european central bank released what are still the latest projections for the area as a whole, placing growth at between - 3. 2 %

and - 2. 2 % for the current year and between - 0. 7 % and 0. 7 % for 2010. as for spain, next friday, repeating an initiative first launched two years back, we shall publish our projections for 2009 and 2010. i shall leave the specific figures for friday ’ s release. but the projections of the banco de espana will simply confirm that the spanish economy is immersed in a deep contraction, where the unemployment rate, if no measures are taken, will rise to a very worrying level and where practically the only positive features are the improvement in inflation and progress in the adjustment of the external sector. it is clear today that the various adverse shocks - both real and financial - triggered by the international crisis impacted the spanish economy when it was in the process of reabsorbing the imbalances it had built up during 15 years of high growth that had brought us progressively closer to the standards of the core eu countries. these external and domestic contractionary forces, having unfortunately superimposed themselves, sharply accelerated the adjustment, turning it into a deep recession similar to that affecting virtually all the developed economies. this recession, however, displays certain specific features in our country derived from the imbalances built up during the previous expansion and from the inadequacy of the measures adopted to strengthen our productive and market structures. in spain the contraction is affecting residential and real estate construction more severely. in these sectors excessive productive resources were concentrated and prices posted growth rates that were too high, taking them beyond levels consistent with their fundamentals. the high debt incurred by spanish households and firms, encouraged by overly accommodative financial conditions but also by optimistic expectations about future income, is now acting as a drag on their consumption and investment decisions. and further exacerbating this is the dizzying deterioration in confidence which, fuelled by the global climate of uncertainty, is pushing households and firms to postpone their spending plans and to strengthen their saving. pinpointing which specific mechanisms lie behind a certain type of behaviour of economic agents'confidence is always a complex task. but in the current circumstances, and especially in spain, it would not be hazardous to link much of the behaviour of confidence to that of employment. the intensity with which employment is shrinking is the most distinctive feature of the recession in spain. in this respect, it repeats traditional patterns of behaviour and shows the persistent weaknesses in the institutional structure of our labour markets that must be corrected. the best way to restore confidence in