Driven by strong domestic demand, output growth reached 3.4% in 2005 and once again outpaced the European Union average. The dynamism of activity should moderate somewhat in 2006 and 2007, even though growth will remain robust at a level slightly above potential rates. In the absence of further oil price hikes, inflation could decelerate, but the differential with the euro area is likely to persist, further weighing on competitiveness. A tighter fiscal policy is desirable not only to moderate domestic demand pressures, but also to prepare for the fiscal consequences of ageing. Overcoming the inflation differential will require fostering competition, in particular in the retail distribution sector, and correcting current deficiencies in the wage-bargaining system. Reducing the segmentation of the labour market would also contribute to enhancing productivity performance, which remains poor.