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Following a period of robust economic expansion, the economy has started to slow, reflecting the spillover effects of the euro area sovereign debt crisis through lower confidence and tighter credit conditions. A moderate easing of growth to 4½ per cent is expected in 2012 as domestic demand softens and international financial conditions remain volatile. Better global growth prospects should contribute to faster growth of 5% in 2013.

While inflation accelerated in late 2011, it has recently eased and inflation expectations remain well anchored within the central bank’s target range. The economic slowdown, though mild, implies there will be little inflationary pressure, allowing the central bank to keep its neutral policy stance for some time. While slower growth and social pressures for higher spending in education will increase the budget deficit in 2012, fiscal policy should thereafter return to the target of achieving a structural deficit of 1% of GDP in 2014.