The Portuguese economy grew by only 0.3% in 2005. With buoyant export markets, a recovery in exports and GDP is expected in 2006 and growth should reach 1½ per cent in 2007. The large negative output gap should allow a decline in price inflation towards the euro area average; and high unemployment is projected to lead to moderation in wage growth, which will help to improve Portugal’s competitiveness. The high level of the fiscal deficit means that it is crucial to sustain on-going consolidation efforts. Besides tax increases and current measures to control the public sector wage bill in the short term, decisive action should continue to better control primary spending. Further efforts to raise Portugal’s human capital, modernise the economy and increase competition are essential for a return to sustained economic growth.