A large, but necessary, fiscal consolidation, continued bank deleveraging and weak external demand are projected to leave the economy in recession for some time. Inflation is set to fall to a very low level as economic slack increases. As global conditions improve and exports pick up, growth is projected to turn positive by the end of 2013, although unemployment will remain at very high levels for longer. Improvements in competitiveness are projected to eliminate the current account deficit by the end of the projection period.
Strict implementation of consolidation plans should remain the priority. At the same time, the government should let automatic stabilisers operate if growth turns out lower than expected in the plans to avoid a worsening of the recession. While bank deleveraging is inevitable, an overly fast pace of credit contraction should be avoided and remaining barriers to credit reallocation removed. Further enhancements in labour and product market flexibility would support a faster recovery.