GDP is projected to grow by 1.9% in 2026 and 2.2% in 2027, driven by domestic demand. The energy price shock will weigh on private consumption and investment in 2026. Inflation will rise on the back of higher energy costs and strong wage growth linked to a tight labour market. Stronger-than-expected wage growth would keep inflation elevated for longer.

Fiscal policy will be expansionary in 2026 before tightening in 2027, despite higher defence spending and a larger public wage bill following public pay reforms. Permanently higher defence spending requires spending reprioritisation, while further pension and tax reforms, such as lowering the high labour tax burden, are needed to support growth and fiscal sustainability in the longer-term. Reducing imported fossil fuel reliance requires reforms to accelerate grid and low-carbon energy investment, such as simplifying permitting processes.

Economic convergence with the OECD’s most advanced economies has continued in recent years. However, growth has relied on employment gains, while weak productivity growth since the global financial crisis has maintained a sizeable productivity gap with the upper half of OECD countries. Gross fixed investment has improved, but mostly in housing. As the population ages and the working-age population shrinks, sustaining growth will require stronger productivity improvements and further increases in labour force participation.

Productivity and investment would benefit from structural reforms, such as deepening capital markets and streamlining permitting processes. Removing tax disincentives for second earners and single parents to work full-time is needed to boost labour supply. Growth-friendly tax reforms should reduce the labour tax burden, funded by higher consumption, environmental, and recurrent immovable property taxation.