After stalling in late 2005, the economy now appears to be back on a recovery track. Average annual growth over the next two years is expected to be around potential (1¼ per cent), helped by buoyant world demand and the lagged impact of easy monetary conditions. The negative output gap will contribute to a moderating inflation rate. With employment rising by only about ½ per cent per year, there should be some recovery of productivity, in turn accentuating disinflation and facilitating export growth. Without bold structural reforms by the new government to raise the economy’s low supply potential and reverse its huge cost disadvantage -- notably via more services competition and wage flexibility -- sub-par growth is likely to persist. Reforms that reduce public spending on a permanent basis at all levels of government would increase the credibility of fiscal policy.