The economy is slowing, with the worsening external environment hitting exports of capital goods particularly hard. Falling confidence, weak real income growth and continued fiscal consolidation will hold back activity and employment in 2013. The expected global recovery in 2014 and strengthening confidence should revive exports, consumption and investment and gradually bring down unemployment. The tax-driven hikes in inflation to well above the euro area average should fade in 2014.
Fiscal consolidation should continue, but the automatic stabilisers should be allowed to operate around the structural consolidation path. In the event of significantly lower than forecast growth, the fiscal space for discretionary action should be used. The rising burden of ageing on public finances should be addressed through raising the retirement age and improving public service efficiency. Structural reforms to boost competition are needed to raise productivity and restore competitiveness.