After a decade of rapid growth, Spain entered a recession of unprecedented depth and length in 2008. While the size of the contraction of output was broadly similar to that of other European economies, it has resulted in a massive rise in unemployment. The recession accelerated the adjustment of the current account deficit built up as a result of dynamic growth of private sector indebtedness, which had funded strong business and residential investment. The economy resumed slow expansion in the first half of 2010, but growth is expected to remain subdued owing to the necessary further adjustments in the housing sector and a high degree of private indebtedness. As a consequence, unemployment is expected to remain high. While fiscal consolidation will put an additional drag on the recovery in the short term, it is crucial to improve confidence among domestic and international economic agents.