Robust economic growth continued through the second half of 2002, despite sluggish exports that reflected the severe drought and the weak global economy. With the residential construction boom likely to peter out, GDP growth may slow somewhat in 2003, but then accelerate in 2004 along with the projected global recovery and higher farm output. Unemployment should fall further, with inflation remaining under control, given sizeable productivity gains and wage moderation.

To maintain price stability, monetary policy will need to become less accommodating once the drought effects have faded and signs of a global pick-up become clearer. The government should maintain its fiscal objective of keeping the budget balanced over the economic cycle. Longer-run growth prospects would be improved by further reforms in the areas of welfare, private pensions, education, competition and labour markets, to encourage more people to participate in the workforce, remain in employment, and further raise their productivity.