The economy is facing strong headwinds, which are exerting a sizeable drag on activity. The financial crisis is resulting in a credit squeeze, declining house prices are putting pressure on household wealth and the sharp increase in commodity prices is eroding workers’ disposable incomes. The response of macroeconomic policy will help to moderate these effects, as will a dynamic external sector which will continue to benefit from the growth of world trade and the weakening of the dollar. After stalling this year, real GDP growth should gradually return to potential next year. The opening of a substantial output gap and higher unemployment, together with stabilisation of commodity prices, should ease inflationary pressures.