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The economy is recovering slowly from a broad-based contraction in spring 2012, which reflected weak domestic demand, fiscal consolidation and slowing exports. A gradual pick-up is projected as world trade gathers pace and the dissipation of the euro area crisis strengthens confidence. The unemployment rate will rise through 2013, but stabilise in 2014.
Consolidation is necessary to secure fiscal sustainability and improve financial market confidence, but if growth proves lower than expected in fiscal programmes the automatic stabilisers should be allowed to work. Substantial labour and pension reforms already in place should boost labour supply, but need to be complemented with improved incentives to hire low-skilled workers and by a wage formation process that better aligns wage and productivity increases.