The economic expansion stalled in the second half of 2002 as a result of a slowdown in export growth. Although the outlook for domestic demand remains weak, a rebound in world trade growth in the second half of 2003 may prompt a mild recovery, with output growth of around 1 per cent in both 2003 and 2004. Such an upturn would be unlikely to reduce unemployment or the rate of deflation. Indeed, a possible strengthening of deflationary pressures poses a downside risk to the projection, as do continued financial sector fragility and the strains associated with a further rise in public debt.

Monetary policy should focus on ending deflation through further increases in liquidity. The accelerated resolution of non-performing loans, in line with the government's objective, should be a priority, accompanied if necessary by the direct injection of public funds. If the bad debt problem were addressed more aggressively, fiscal policy should allow the automatic stabilisers to respond to any negative effects on output and employment. But it is also essential to set out a medium-term fiscal consolidation framework incorporating targets for spending. The economy needs to be revitalised through an acceleration of corporate restructuring and the implementation of structural reforms on a broad front.