Spain’s recent economic performance has been remarkable, with 2006 marking its 13th consecutive year of growth, one of the longest periods of sustained growth in its recent history. However, there are persistent signs of imbalances that threaten to derail the strong performance, although recent data suggest some improvement. The inflation differential with the rest of the euro zone remains significant, undermining international competitiveness. Driven by vigorous growth of private consumption and residential construction, domestic demand pressures have intensified, contributing to the worsening current account deficit. Addressing these imbalances is crucial in order to maintain the good recent performance. This section examines the recent behaviour of the economy, provides a short-term projection and identifies the main risks surrounding it. It analyzes in more detail the possible overvaluation of the housing market and the behaviour of the inflation differential and ends by providing a set of policy recommendations to help tackle these problems.