The economy has weathered the downturn relatively well and the recovery should compare favourably with that of the other major European countries. Strong household demand has been a key element, supported by low interest rates and rising housing wealth. Rapidly growing public expenditure is providing additional support to activity and will continue to do so, being gradually supplemented by growing external demand and a revival of investment.

Monetary and fiscal policy have provided a stable macroeconomic environment to date. However the current surge in house prices creates a dilemma for monetary policy as to whether to act before any potential bubble becomes a risk to macroeconomic stability. The large increases in public expenditure, needed to address deep-seated structural problems in education, health and transport, are not expected to break the authorities’ fiscal rules. However the government faces a challenge in ensuring that the higher spending is fully translated into better public services.