Economic growth is projected to increase to 2% in 2015 and 2.2% in 2016. Real wage gains will support higher private consumption, while the improved business outlook and the ongoing recovery of the housing market will support investment. Exports are set to continue to increase steadily, boosted by the recovery in the European Union and the low value of the euro. Employment is set to rise significantly and the unemployment rate to fall gradually.
The planned slow pace of structural fiscal consolidation is appropriate given the strengthening but still uncertain recovery. Further reforming employment protection would support job creation and benefit labour reallocation to more productive uses. If the recovery of the housing market proves durable, policy makers should accelerate the reduction of mortgage interest tax relief. Tax and benefit reforms to improve work incentives for second earners would remove a disincentive to women working longer, thus boosting their earnings. The return to trend-based budgetary policy should contribute to budgetary discipline during the government term while allowing automatic stabilisers to operate on the revenue side.
Investment is almost 20% lower than it was before the crisis, mostly due to lower residential investment. Business investment has held up quite well since the crisis, although its share of GDP remains moderate compared to other European Union countries, and growth in the capital stock has fallen significantly since the late 1990s. Access to finance for SMEs is improving, but related policy instruments, in particular public loan guarantees, could be further developed. Relaxing the tight land use regulations could boost residential investment.