The economic expansion is likely to moderate during 2008, with a trough in the second quarter. Output growth is being slowed by tighter financial conditions, higher inflation and weaker housing market activity. Growth is expected to drop below potential this year, before picking-up slowly through 2009 as financial headwinds dissipate and the external environment improves. Domestic demand should be underpinned by continued job creation and a modest pick-up in wage growth. Inflation has risen markedly, but is projected to decelerate towards 2% as demand eases and energy and food price effects drop out of the headline measure.