The economy is expected to pick up from mid-2013 onwards, as exports recover slowly from the negative impact of the euro crisis and improving business and consumer confidence support domestic demand. Needed fiscal consolidation is weighing on domestic demand. Growth is projected to be too low to prevent a further widening of the output gap, implying continued weak inflation.
The government’s policy of an unchanged structural fiscal stance and allowing the automatic stabilisers to play is appropriate in the current conjuncture. However, as the recovery gets underway, fiscal consolidation will need to resume to reduce the structural deficit. At the same time, monetary policy should become more accommodative. To make economic growth more inclusive, the gradual increase in the statutory retirement age should be combined with further reforms of the tax-benefit system to foster female labour market participation and raise employment of low-skill workers.
Note: All data definitions based on internationally comparable standards and may differ in specific cases from common national definitions.
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