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After stagnating in the first half of this year, economic activity is expected to pick up modestly. Real GDP is projected to grow by just 0.6% in 2012 and 1.2% in 2013. Residential investment might decrease as house prices have started to decline from high levels, and affordability is poor. The unemployment rate may peak at 10.5% at the beginning of 2013 and fall only slowly thereafter. Headline inflation should recede to below 2% in 2013.

Despite weak growth, the 2012 target for the general government deficit of 4½ per cent of GDP is likely to be attained, given a better fiscal outcome in 2011 than had been expected. The authorities should stick to the 2013 deficit objective of 3% of GDP by reducing public spending. This fiscal strategy should be accompanied by measures that boost potential growth, including by changing the tax structure and undertaking a wide range of reforms in education, labour and product markets.