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The economy lost momentum this year, reflecting the uncertain external environment and weakening household confidence as unemployment increased and house prices fell. From mid-2013, however, growth is projected to pick up to beyond its potential rate. The unemployment rate is projected to begin to fall, although remaining spare capacity should keep inflation at low rates.
The macroeconomic policy stance is appropriate, but the scope for more stimulative monetary and fiscal policies should be used if growth proves to be weaker than expected. To avoid unemployment becoming entrenched, the government should continue its efforts to lower the relative labour cost for groups at risk.