After a soft landing in 2003, growth of Mainland GDP bounced back, reaching 3½ per cent in 2004. Domestic demand gained momentum in the second half, fuelled by historically low real interest rates, favourable terms of trade and rising domestic confidence. Mainland growth is projected to accelerate in 2005 to 3¾ per cent, while slowing to a more sustainable 3% pace in 2006.

Fiscal credibility needs to be reinforced via stricter adherence to the fiscal guidelines, and a less expansionary macro policy stance is necessary to support long term sustainability objectives. In this respect, the spring debate about reforming pensions and labour market incentives will be crucial.