Economic activity is projected to contract further in 2013, driven by rapid fiscal consolidation and ongoing deleveraging in the financial and corporate sectors. Growth is projected to turn positive again in 2014. Unemployment is unlikely to level off until the end of 2013, and the large degree of economic slack should keep inflationary pressures contained.
The new government has embarked on an ambitious fiscal consolidation. It should, however, stand ready to let automatic stabilisers operate if growth turns out lower than expected. To bolster longer-term fiscal sustainability, it should implement an ambitious pension reform as well. A transparent and durable resolution of bad assets in the banking sector is urgently needed to ensure the stability of the financial system and revive credit activity.