The economy stalled in the first half of 2003, but has since recovered somewhat. Growth should gradually gather strength during 2004, largely in response to more robust world trade growth. Employment has held up well, thanks to structural reforms. Persistently high inflation is harming competitiveness, but a continuing large output gap and decelerating unit labour costs should support disinflation during 2004. The public sector deficit-to-GDP ratio is increasing in 2003 and could rise further in 2004 because of the weak economy and the likelihood of higher than programmed public capital spending. In the absence of corrective measures, the 3 per cent threshold could be exceeded in 2005. A significant decline in the high debt ratio will require additional structural measures, notably a faster implementation of the recent pension proposals. More rapid progress in product market reforms is also required to bring inflation closer to the euro area average and spur investment dynamism...