Economic growth is projected to strengthen, driven by both domestic and external demand. A robust labour market, low interest rates and low oil prices will underpin household spending, while the recovery of the euro area and the depreciation of the euro will boost exports. Business investment is expected to recover as capacity utilisation rises. The already low unemployment rate will fall further, while consumer price inflation is projected to rise in 2016. The current account surplus is projected to remain high.
In the near term, the structural budget surplus could be reduced to increase long-term growth-enhancing government spending, in particular to improve childcare services and provide more support in the education system for youth with weak socio-economic background. Steps to reduce high taxes on second earners would remove a barrier to women who want to work full-time, and would help to offset the negative impact of demographic ageing on medium and long-term growth prospects.
While residential investment has expanded robustly since the outbreak of the global financial crisis, non-residential fixed investment and spending on knowledge-based capital has remained subdued, despite unusually favourable financing conditions. Structural reforms to strengthen competition in services sectors would raise potential growth and investment. In the government sector, investment has fallen short of depreciation over the past 10 years. Investment in transport infrastructure needs to be raised.