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The global economic slowdown and uncertainties in the euro area outlook, alongside fiscal retrenchment and private deleveraging, are generating headwinds to growth. Growth will remain weak in the first half of 2012, but should gain momentum thereafter, with private consumption supported by higher real incomes, as inflation slows, and exports and business investment revive with stronger external demand. Unemployment will continue to rise over the projection period, due to job cuts in public administration and weak output growth.
Budget deficit reduction remains on target, fostering fiscal policy credibility and leaving room to let the automatic stabilisers work. Structural reforms to promote fiscal sustainability, strengthen the financial sector and improve educational outcomes should help the necessary rebalancing of the economy from debt-financed private consumption and public spending to exports and investment.
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