Driven by domestic demand, economic activity should gain strength in 2006 and 2007. Employment is projected to continue to grow and unemployment to fall. Productivity growth may also recover somewhat but not to the rates achieved earlier in the decade. Inflation is likely to increase but remain below the central bank’s target of 2½ per cent. With low inflation expected until 2007, monetary policy could be eased further. Despite a narrowing of the budget deficit in 2005, fiscal consolidation remains a key challenge. Structural reforms are needed to contain social spending, to enhance productivity gains and to ensure that they will be coupled with strong economic growth.