Growth is projected to slow considerably in coming quarters as a result of weaker domestic and external demand. However, activity should pick up again in the second half of 2013 and strengthen further in 2014. Yet slack in both product and labour markets will increase, pushing inflation below 2% in 2014. The current account deficit should stabilise above 3% of GDP in 2014.
While the government can allow the automatic stabilisers to function, the reduction of the structural budget deficit needs to continue. A sizeable monetary policy easing would help accommodate fiscal tightening and alleviate the cyclical downturn. The government should implement structural reforms to boost potential growth and strengthen the recovery.