Executive summary

The economy is slowly emerging from a deep recession, which will have a lasting effect. While the depth of the recession in terms of real GDP has been similar to other advanced OECD economies, it has led to a much larger increase in unemployment and a sharper deterioration in government finances, both to a large extent structural. In Spain, the global crisis has been compounded by an unsustainable domestic demand boom driven by residential and business investment, resulting in rising private sector debt. While fiscal and financial policies had been relatively prudent before the crisis, investor confidence declined during the crisis and this may weigh on the recovery as sovereign spreads remain high. Nonetheless, following the publication of bank stress tests and bold policy initiatives, funding conditions have improved.

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