Activity stagnated in late 2003 and the beginning of 2004, but stronger growth is expected from mid-2004 and into 2005 as world demand accelerates and uncertainties due to domestic corporate governance problems recede. Employment growth has moderated since mid-2003 but should pick up again as the recovery gathers momentum. Inflation should drop below 2 per cent during the first half of 2004, responding to a widening output gap, before rising again during the ensuing recovery. The public-sector deficit was around 2½ per cent of GDP in 2003. On present policies, slow economic activity and high government spending -- together with the ending of one-off measures -- could push it to around 3 per cent of GDP in 2004 and 4 per cent in 2005. Further restrictive budgetary measures are thus needed. Faster inflation convergence towards the euro area would call for lower unit labour cost increases and more competition in product markets...