After picking up sharply at the beginning of the year, GDP growth slowed to 1.6 per cent in the second quarter. Demand was supported by relatively robust personal and government consumption expenditure, while investment spending and stockbuilding remained weak. Growth has lost momentum during the second half of the year as consumer and business confidence weakened markedly. The slowdown appears to have halted the trend rise in core inflation, while the unemployment rate has remained broadly stable at a level close to its structural rate. Looking forward, growth is projected to remain moderate before slower rates of destocking and a pick-up in external demand prompt a recovery, with output increasing by somewhat less than 2 and 3 per cent in each of 2003 and 2004.

In its execution, the 2002 Budget represented a substantial easing of fiscal policy, with almost half of the slippage being structural in nature. The draft budget for 2003 does not include well identified measures to redress these overruns, so that the fiscal situation may deteriorate further if cyclical weakness persists. In order to prevent the overall debt from exceeding 60 per cent of GDP and so as to ensure the future sustainability of public finances, especially in the face of rising pension obligations, substantial budgetary savings will need to be found in the near future.