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The anticipated acceleration in growth has been delayed by the global slowdown and a wave of strikes. Growth is expected to be 2.6% in 2012, below potential, but is projected to pick up to 3.3% in 2013 and 4% in 2014. Core inflation will be contained by the large degree of slack in the economy, although recent food price increases are expected to fuel a temporary rise in headline inflation. Weak export volumes and the worsening terms of trade have widened the current account deficit this year and will take it to around 6% of GDP in 2013-14.

The government should continue to reduce the structural budget deficit, but allow automatic stabilisers to work in the event of slower-than-expected growth. Monetary policy should be used to provide short-term stimulus; there is scope for further easing while staying within the inflation target band. A combination of competition-friendly product market reforms, better education and training and active labour market policies is needed to raise employment durably.