Domestic demand sustained activity during the first half of 2004, but net foreign demand weakened. Inflation has risen due to the oil price shock leaving the positive differential with the euro area at around 1 percentage point. Although some weakness can be expected in the short term because of the oil price hike, activity should accelerate again to close to 3 per cent over the projection period. Monetary conditions remain relaxed, while the budget for 2005 implies a broadly neutral fiscal stance. Reforms to raise competition in some sectors and to improve the wage bargaining system should be adopted with the aim of raising productivity growth and reducing the inflation differential with other countries. ...