GDP grew by 1.2 per cent in 2002, with robust personal and government consumption offsetting a decline in investment and a sharp fall in inventories. Inflation pressures have reversed although unemployment is up only marginally. Output is projected to rise by only around 1¼ per cent overall in 2003, the product of weak conditions in the first half and an acceleration in the second half that should see the economy expand by more than 2½ per cent in 2004. Meanwhile, consumer price inflation should decelerate to around 1½ per cent in 2003, before stabilising.

Fiscal policy relaxed substantially in 2002 and the authorities expect the deficit to reach 3½ per cent of GDP this year. As a result, government debt is likely to rise to more than 60 per cent of GDP. Although measures in place should permit the deficit to fall in 2004, significant additional efforts will need to be made to restrain the pace at which expenditures rise if the authorities are to achieve their goal of reducing the deficit below 3 per cent of GDP.