Following a contraction of 5.7% in 2020, GDP is projected to rebound by about 3% per annum on average in the next two years. New restrictions to contain a second wave of infections this autumn will delay the recovery. As restrictions are lifted, an effective vaccine is deployed, and global trade picks up, domestic and external demand will begin to recover from mid-2021 onwards. The labour market will improve from mid-2021 as well, while inflation will continue to be elevated.
Fiscal policy will remain supportive as social security contributions are further reduced. Monetary policy has limited room for further countercyclical action given continued inflationary pressures, which are only partly imported. Phasing out temporary measures to preserve existing businesses in a timely way is needed to enable effective reallocation. In addition to active labour market policies, a longer maximum duration of unemployment benefits (currently limited to three months) would support employment transitions to ensure a stronger recovery.
Growth is expected to have risen further to 4½ per cent in 2018, following past strong performance. Domestic demand is fuelled by strong private consumption, reflecting high real income gains, and dynamic business and housing investments. The unemployment rate has fallen to a historically low level and labour shortages have emerged. This has been, accompanied by strong and broad-based wage increases, helping to preserve a high level of income equality, and restarting income convergence. Inflation reached 3.8% in the autumn of 2018, partly as the result of higher energy and food prices, before coming down again. Productivity growth has accelerated, although it remains well below real wage growth and the rate prevailing in the decade prior to the international financial crisis.