Economic growth is likely to be uneven during the first half of 2005. A recovery is set to establish itself later in the year with growth averaging 2-2½ per cent through to the end of 2006. Domestic demand will be less strong in 2005 than in 2004 but export growth should respond to increasing foreign demand, picking up quite strongly later this year. Employment growth will be modest, permitting only a small fall in unemployment. Underlying inflation may increase slightly, though headline inflation is set to decline. While the budget deficit may ease, it is likely to stay stuck at 3% of GDP.

Quarterly data for GDP growth has been particularly volatile since mid-2004; the slowdown in the first quarter of 2005 was partly due to lower public spending. On the other hand, the recent announcement of a supplementary increase in public sector wages, relatively small in itself, is symptomatic of a need for continuing efforts to control public spending if the deficit is to be reduced by more than foreseen in these projections.