After a sizeable contraction in 2009, GDP growth should progressively resume in 2010, and gather pace in 2011, on the back of a strengthening foreign demand and easing credit conditions. Unless the upcoming election year repeats past electoral profligacy, planned fiscal austerity should curb domestic demand. The unemployment rate will peak at over 10% in 2010 before falling slightly. The significant output gap and the recent appreciation of the exchange rate have dampened inflationary pressures, which should not increase before the recovery gains momentum.

Real GDP growth fell sharply in the fourth quarter of 2008 as the recession in the euro area curbed exports, adding to already weak domestic demand which reflected fiscal restraint and tight credit conditions. The economy will be in deep recession in 2009 before slowly picking up in 2010.

Against the background of global financial turbulence, economic activity is set to decline in 2009, before picking up with the recovery in world trade and with higher confidence following international financing support. Inflation should decelerate towards the 3% target as wage growth remains moderate. The current account deficit should narrow.

Growth decelerated markedly during 2007, reflecting fiscal consolidation. It is likely to recover over the projection period, supported by buoyant exports and gradually reaccelerating investment and consumption. Inflation is projected to decelerate towards the 3% target, as wage growth remains moderate. The external deficit should continue to improve.