GDP growth is projected to slow to 4% in 2022 and 2.5% in 2023. Domestic demand will be the main growth driver. The labour market is expected to remain tight, continuing to put upward pressure on real wages. Together with high food and energy prices, this will keep headline inflation elevated until the end of 2022. Thereafter, inflation is projected to recede slowly, reflecting a slowdown in domestic demand growth as fiscal and monetary policy tighten. A major risk is that a combination of stronger wage growth and continued high energy prices could further de-anchor inflation expectations.
The COVID-19 pandemic interrupted the strong economic growth performance in 2016-19, which entailed large increases in employment and real incomes, and the lowest unemployment rate in thirty years. The swift vaccination rollout allows a faster recovery from the pandemic from mid-2021 onwards. However, the strength of the recovery is uncertain, reflecting the potential scarring of the economy arising from the prolonged crisis. Looking further ahead, population ageing will lead to a smaller and older workforce, reinforcing the need for improving the productivity performance of the economy to restore the impressive employment and income gains achieved before the pandemic. In the near term, underutilised labour resources, such as low skilled workers, need to be mobilised through higher labour mobility and skills upgrading. Thereafter, maintaining productivity growth requires improved vocational and tertiary education, more competitive markets, and faster adoption of new technologies, particularly to accelerate the digital transformation of the economy. These policies should be implemented alongside measures to promote green growth and prepare public finances for the long-term fiscal challenges associated with population ageing.
To ensure a speedy recovery that benefits all, the improvement of the business environment and skills should be on top of the policy agenda. State-intervention and regulatory barriers hamper market entry and dampen productivity. Low graduation rates from tertiary education, weak vocational training outcomes and high drop-out rates lower employment prospects of young adults, who are at risk of long-term scarring given the impact of the pandemics on the labour market.
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2021 Structural Reform Priorities