Exports and investment activity rose markedly in the first half of 2004, ending their protracted slump. Domestic demand will sustain the recovery, though the pass-through of higher oil prices may restrain demand growth temporarily. GDP growth of 1½ to 2 per cent is projected over 2005-06, which would be above the estimated rate of potential. Inflation could start to rise again as the output gap closes. A planned tax cut in 2005-06 and a pension reform as of 2008 could improve the conditions for growth, but a sustained public debt decline will be a sine qua non for building private agents’ confidence, so that more and earlier public spending reforms are needed. Competition reforms in service sectors, including energy, transport, finance and education, could help to narrow the inflation gap with euro area partners, while also spurring innovation and a more competitive export structure. ...