The economy virtually stagnated in 2003, reflecting weakness in both domestic demand and exports. Prospects look brighter for 2004 and 2005, when household spending should accelerate and exports pick up. Labour market pressures eased significantly last year, and collective wage negotiations in spring 2004 have delivered lower compensation increases than the previous rounds. Wage and price inflation should remain contained, as output is projected to stay below potential over the projection period. On top of the tax cuts implemented at the beginning of 2004, the government recently announced further measures to boost activity. Although this extra easing is relatively small, it risks coinciding with new interest rate cuts and already accelerating output. Some of this stimulus will therefore need to be removed as the expansion gathers steam. Further initiatives to raise labour force participation would help to sustain the upturn and bring employment closer to the government’s long term target...