Activity is gathering pace, especially in export-oriented manufacturing industries, and business surveys suggest that activity will be robust in the first half of 2006. However, the recovery has yet to feed through to household consumption. This may well occur soon, underpinned by employment growth and a moderate pick-up in wages. Overall, growth should average about 2¼ per cent through 2006-07. Were it not for Germany’s value-added-tax increase, inflation would be below 2% next year. With persistent oil price pressures and as evidence builds up that the recovery is firming, the need for monetary tightening should become clear. Its actual pace should be conditional, however, on unambiguous signs that economic slack is shrinking. Governments need to make greater efforts towards fiscal consolidation throughout the current economic upswing. Further reforms to enhance the Single market, including for services, would improve the euro area’s economic performance and its resilience to shocks.