Output grew slightly in the first half of 2002, as strengthening net exports more than offset a continuing fall in domestic demand. The recession in equipment investment deepened and private consumption continued to contract. The stronger external contribution to growth was due to a rise in exports but, more importantly, a marked fall in imports reflecting the weakness in domestic demand. While destocking might have reached its trough, growth remains very weak and unemployment is increasing. Growth should pick up in 2003, driven by strengthening exports. As activity broadens in 2004, GDP is projected to grow above potential, at some 2½ per cent.

The general government deficit is projected to total 3.7 per cent of GDP in 2002 and remain above 3 per cent in 2003. Further expenditure reforms are required to reduce the cyclically-adjusted deficit in a sustainable way, and measures need to be taken to raise the growth path of the economy, notably with respect to improving the functioning of labour markets and streamlining government transfers.