wage and price - setting mechanisms more flexible and facilitating the reallocation of factors of production across sectors, is the main instrument available to economic policy makers and economic and social agents to enable each, in their respective areas of responsibility, to contribute to easing the downturn and promoting prompt recovery. all matters relating to the functioning of the labour market, good industrial relations, collective bargaining and outstanding reforms take on great importance in the current situation. this is because the dynamism of the spanish population as a supportive factor for limiting the intensity and scope of the slowdown largely depends on labour market flexibility. this is especially so at the current juncture, with rising wages and a deteriorating inflationary situation. hence, the search for formulas permitting a resumption of a trajectory of wage moderation has become a priority, such moderation, with the support of social agents, having yielded such good results in terms of employment generation in the recent past. among other measures, i have in mind changes to the current wage indexation arrangements, which tend to prolong the impact of inflation surges. changes are also needed in the collective bargaining framework and in labour hiring, in order to facilitate the adjustment of wages to the new cyclical situation and to smooth the adjustment in employment. obviously, however, these measures need to be complemented by resolute reforms to the competitive environment in which firms and agents take their decisions through liberalisation and deregulation policies that help reduce the constant growth in profit margins in less competitive sectors and to boost efficiency and productivity. from the viewpoint of the longterm needs of the spanish economy, all this should be accompanied by improvements in education and in training in order to adapt workers ’ skills to the new requirements and to boost their inter - sectoral mobility. allow me one final reflection not so much on what should be done as on what should not. it is true that the global slowdown is leading many governments to embark on different forms of protectionism, responding to the calls of those economic agents who are demanding help against foreign competitors. it is a mistake to succumb to such calls. spain should not follow this bad example, since any measures in favour of specific agents solely on the basis of their nationality would ultimately harm other spanish companies and all spanish citizens. on the contrary, we should continue to adhere to increasing openness to competition and to the foreign investment that has contributed so much to our well - being in recent decades, focusing our efforts on promoting a climate con

second half of 2008. that said, considerable upside risks remain, linked essentially to the possibility of second - round effects emerging in wage - and price - setting. the spanish economy ended the year 2007 with a gdp growth rate ( of around 3. 5 % ) that we might qualify as robust. but it began to show signs of undergoing a change in cycle, following an upturn that had lasted for more than ten years. into 2008, the information available confirms this perception of the domestic macroeconomic situation. in 2007, gdp growth averaged 3. 8 %, the result of some easing in domestic demand and an improvement in the contribution of net external demand to output growth. against this background, the slowing trajectory on which the spanish economy embarked during 2007 was consistent with the tailing off of some of the impulses behind the buoyancy of spending in previous years, and with the maturing of the business cycle. undoubtedly, the raising of interest rates by the ecb – from end - 2005 to june 2007 – and the increasingly subdued rises in house prices began to temper consumption and residential investment decisions as early as 2006. this gradual loss of momentum in domestic demand continued in 2007, but was not reflected on a similar scale by gdp, owing to the offsetting effect of net external demand. adding to this domestic adjustment dynamic was, from summer 2007, the effect of international financial market instability. this translated into a deterioration in agents'expectations, and made itself felt in some spending components – consumption and, above all, residential investment – as early as late 2007, but more clearly in the opening months of this year. however, the weakening in consumption is based on comparison with the relatively high end2007 figures, with growth close to 3 %, held up by the dynamism of disposable income. and i believe it is particularly worth noting that investment in equipment ended the year at a rate of increase of close to 9 %, highlighting the robustness of business activity in the closing months of 2007 against a backdrop of sound corporate earnings and a favourable demand outlook. the demand for housing, which had moved onto a mildly slowing path in mid - 2006 in response to higher borrowing costs and lower real estate appreciation expectations, appears to be showing greater sensitivity to the deterioration in agents'confidence, according to the latest available information. recent figures reveal a loss of momentum in activity and employment in the construction and related sectors, as they do more generally, but on a lesser scale, in the rest of