The recession is projected to intensify with the economy contracting again in 2013. Growth is projected to return in 2014. Jobs will continue to be shed and the unemployment rate could rise to over 26%. Significant fiscal consolidation, weaker demand from trading partners and difficult financial conditions will take their toll. Inflation is expected to remain subdued after a VAT-related spike in prices. Notwithstanding ongoing underlying consolidation, the fiscal deficit is projected to fall only gradually owing to weak economic growth.
Bank restructuring should proceed briskly as planned, and subordinated owners of the debt of banks receiving government support should absorb losses. It is important that the government spells out and fully implements the fiscal measures needed to achieve medium-term deficit targets. However, it should stand ready to let the automatic stabilisers operate were economic conditions to materially diverge from those expected in the government budget. The government should continue its structural reforms to boost growth, giving priority to ensuring that the recent reforms to reduce labour market duality and to reform wage bargaining are effective. Key reforms for longer-term growth are reducing school drop-outs and improving access to upper secondary vocational education.