The economy continued to perform strongly in the first half of 2002, as buoyant domestic demand more than offset the weakness of exports. With monetary conditions remaining supportive and the global environment expected to improve, economic growth is projected to remain robust, despite the current farm drought and a likely downturn in the residential property sector. The labour market may improve further, while the combination of wage moderation and sizeable productivity gains will help keep labour costs and inflation under control.

The favourable economic outlook should permit a more neutral setting of monetary and fiscal policies, to lock in price stability and ensure budget balance over the economic cycle. Further decentralisation of wage bargaining should help to lower the still high structural unemployment, while reform of the income support system should aim at strengthening the incentives of welfare recipients to participate in gainful employment.