The economy is weakening markedly as world trade has slowed. Unusually low interest rates are supporting domestic demand, raising imports and reducing the current account surplus. As export markets recover, real GDP is projected to expand by ½ per cent in 2013 and by 2% in 2014. Unemployment is projected to rise somewhat in 2013. Consumer price inflation is projected to remain close to 2%, on the back of rising energy prices and robust domestic demand.
The fiscal rule for the central government allows for the full working of the automatic stabilisers, providing some welcome confidence-building support for activity. Available discretionary fiscal space should be used if overall conditions were to deteriorate significantly. Structural reforms to deregulate professional services, remove barriers to entrepreneurship and improve access to tertiary education would strengthen growth performance and narrow the current account surplus.