1. Economic environment International

World activity: more leading players
The first half of 2006 ended with global economic growth rates that continued to outstrip even the most optimistic expectations. In developed countries, the US has registered an average annual growth rate of 3.5% in the last year. Both Japan and the euro zone have shown signs of rising growth rates. The main emerging economies continue to present high growth rates.

This international context continues to be marked by moderate inflation, despite economic growth and the hike in commodities prices. However, there is increasing concern about the possibility of inflationary pressure from inputs eventually being passed through to the rest of the economy. This has produced greater uncertainty about monetary policy, especially in the US. When the interest rates discounted by the markets in May are compared with current rates, a clear increase can be seen. An economic scenario characterized by less global liquidity has meant that volatility is no longer at minimum levels and the appetite for risk has diminished.

In any event, the forecasts suggest that relatively generalized growth will continue. Although some economic indicators in the US have recently shown more moderate activity, the growth rates observed and foreseen are relatively high. The industrial sector and its investment levels continue to be favoured by corporate profits, although the rising interest rate path could lead to a moderation of this trend. On the other hand, the increase in consumption is tending towards a degree of stability. Despite the performance of energy prices and real estate assets, the consumer confidence indices are supported by the financial wealth accumulated in the stock markets and by low unemployment levels. These factors could counterbalance the slowdown in the real estate sector, which will lead to slight moderation in private consumption in the second half of 2006. In our central scenario, we expect the US to register growth of 3.3% in 2006 and of 3.2% next year.

In the EMU the first signs of a recovery in household spending are at last being seen. In Germany, one of the economies that is most behind in this expansion, the indicators continue to be positive and optimism has become more generalized. Lastly, Japan continues to move towards average growth of 3%. At the end of the first quarter of this year, its output gap moved onto positive ground for the first time in over eight years. The outlook is still optimistic, and sustained throughout 2006
and 2007.

This whole new global balance, with a stronger domestic demand in Europe and Japan, paves the way for a world economy less dependent on the U.S. and China. Moreover, this would be a helpful factor levelling off global imbalances. This positive international context will keep supporting world trade and export-oriented industrial sectors.

Given the stable growth and the relatively contained inflation, is that interest rates in the United States will remain on 5.25% during 2006
and 2007.