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Growth is projected to strengthen as higher foreign demand and improved competitiveness boost exports. Domestic demand will be held back by slow income growth, but brightening employment prospects and consumer confidence, together with low interest rates, will support consumption and residential investment. Inflation will pick up gradually, as spare capacity shrinks.
The Competitiveness Pact signed by the social partners in mid-2016 is improving cost-competitiveness, which had deteriorated in recent years. The pact is restraining household income growth, but this is partly offset by tax cuts. The government has reformed unemployment insurance to enhance work incentives, but employment needs to be boosted to foster inclusive growth.
Globalisation has propelled productivity gains and improvements in living standards for decades. The extensive social safety net and high investment in skills have helped workers to adapt to changes induced by global developments. Continued cost-competitiveness, sustained investment in education and R&D are the keys to reaping the benefits of globalisation.