After two years of near-stagnation the Dutch economy contracted in the first half of 2003. GDP is set to decline by ½ per cent for the year as a whole, as consumers are adjusting to weak disposable income and fading wealth effects, business is struggling to restore competitiveness and sound balance sheets and the government has tightened fiscal policy. Although real GDP growth may reach 1 per cent in 2004 and accelerate to 2 per cent in 2005, this would still leave a substantial negative output gap and the unemployment rate is expected to increase to 5 per cent in 2004. This should lead to a further deceleration in wages and prices. Restoring international competitiveness is key for GDP growth to return to rates at or above potential. The government should increase the safety margin in the cyclically sensitive fiscal balance in order to avoid the need for pro-cyclical tightening in the future...