Summary: Context. The recovery has strengthened and employment is increasing, driven by the rebound in consumption and investment. Reforms and strong policy implementation have supported the return of confidence, and significant external tailwinds are helping. However, the level of unemployment remains very high and without further reforms the growth momentum is expected to slow in the medium-term. This reflects still sizable public and private debt overhangs and persistent structural problems, including remaining impediments in the labor market and the low productivity of Spain’s many small firms. Policies. Sustaining the current high levels of growth and job creation over the medium term and further reducing vulnerabilities will require additional policy efforts. Key priorities include the following: Enhancing labor market performance. Maintaining wage growth in line with developments in productivity and external competitiveness, ensuring wages adequately reflect differing business conditions across firms, lowering duality, and enhancing the skills of the long-term unemployed will improve prospects for higher and more inclusive growth also in the medium term. Supporting growth of small firms. Removing obstacles for Spain’s many small firms to grow will allow them to benefit from economies of scale both in domestic and external markets and raise productivity. Facilitating private deleveraging. Continuing to reduce firm and, especially, household debt will foster investment and growth. Further strengthening the banking system will ensure that banks can support growth as credit demand recovers. Anchoring confidence. Sustaining a gradual and growth-friendly fiscal consolidation, well coordinated across all levels of governments, will help maintain strong market confidence and put public debt on a firmly declining path.

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