The UK economy has so far shown greater resilience in weathering the downturn than any other major European economy. An expansionary fiscal stance and a reduced drag from net exports should ensure a slight pick-up in growth this year, despite a slowdown in consumption. As business investment and exports revive, the output gap should begin to close in 2004 with inflation falling back to the official target.

The recent and prospective deterioration in the government financial balance is not an immediate cause for concern given the relatively low level of debt. The 'golden rule' is likely to be met over the current cycle, but with a worse starting position there will be a greater challenge in meeting it over the next cycle. The recent easing of monetary policy, while justified by signs of weakening domestic and international demand, may fuel the housing market and does nothing to reduce the risk of a sudden fall in house price inflation or even possibly an abrupt fall in the level of house prices.