A steady upswing is taking place. Output growth has picked up to its potential rate, driven by household spending and a recovery in exports. External demand is projected to continue to provide stimulus and will be aided by a rebound in business investment. Inflation is below target, although there is a small risk that this year’s wage negotiations may put upward pressure on prices. Fiscal expansion is not warranted; rather, further increases in the structural surplus would be appropriate in order to prepare for looming age-related spending pressures. The Riksbank should also remain cautious, despite the recent surprisingly weak inflation outcomes, maintaining the focus on prospects over a two year horizon and gradually withdrawing monetary stimulus in anticipation of the closing of the output gap in 2005. Reductions in working hours should be avoided...