Growth is projected to continue steadily at a rate of close to 5%. Domestic demand should expand rapidly as strong income growth continues and government spending provides additional impetus. Despite strong wage growth, inflation is projected to remain relatively muted, edging up to 2¾ per cent in 2006. At the same time, increasing unit labour costs weigh on competitiveness.

Strong wage pressures in some sheltered sectors, where regulations limit the scope for competition, could revive inflation. Further liberalisation in network industries, in retail distribution and in professional services would improve resource allocation and help curb the risk of renewed price and wage inflation.