The economy is gradually coming out of a severe recession. The decline of output has ceased since the summer, though significant trouble spots remain. The risk of new large bankruptcies in the banking system has diminished, but equity capital will need to be replenished to offset financial losses. The household sector is also undergoing significant adjustment, with a sharp reduction of debt and rebuilding of assets. Sizeable macroeconomic stimulus and easing financial conditions will support growth, though it will be somewhat weaker than during past recoveries. Unemployment will decline slowly.

The economy is set for recovery, supported by improving financial conditions, an expansionary monetary policy and stronger international growth. However, the pick-up will be slow with GDP projected to grow by slightly more than 1% in 2010 reflecting strong headwinds from balance sheet adjustments, a still weakening labour market and fiscal tightening. In 2011 the recovery will gain momentum, but resource utilisation will remain low and the unemployment rate is projected to reach 9.5%. Inflation is likely to remain below the 2% target for an extended period.

Output is on track for a record year-on-year decline in 2009 of 6.5%. However, four quarters of negative growth ended with a strong rebound in the second quarter of 2009. Inflation fell from 11.9% in October 2008 to 5.3% in September 2009, and the current account deficit is expected to fall from 5.5% of GDP in 2008 to around 2% in 2009. After recovering more moderately in the rest of the year, GDP is projected to expand by 3.75% in 2010 and 4.5% in 2011.

Positive growth is projected to resume from the end of 2009 onward, driven by growing demand from trading partners and improving activity in financial markets. Unemployment may rise to about 5% while inflation is projected to be low but positive. Leading business cycle indicators have improved markedly in recent months, turning positive from low levels in the second quarter of 2009. Orders in manufacturing have risen to a level indicating expansion in the fourth quarter. Growth is expected to pick up in 2011, reaching 2.1% at the end of the year.

The Swedish economy has experienced a deep contraction, triggered by the global economic crisis. A gradual recovery has started but economic slack is very large and unemployment will remain high for some time. Consumer and business confidence have been improving over the past six months and retail sales have picked up. Financial market conditions have also improved, with spreads on interbank and mortgage rates having reverted towards more normal levels. Lending to households has started to accelerate, although lending to firms is still slowing.

Output is projected to fall by 3.5% in 2009 and by a further 0.25% in 2010 before recovering at a slow rate in 2011. The unemployment rate is expected to peak close to 20% in 2010. Inflation may rise temporarily in 2010, reflecting higher oil prices and projected value added tax increases, but is expected to fall to close to zero in 2011. The decline in housing transactions has levelled off and the fall in house prices has flattened.

Real GDP growth will be negative in 2009, but should turn positive in the fourth quarter and accelerate in the first half of 2010, boosted by the soccer World Cup. Inflation should return to the target range in 2010 aided by a substantial output gap and the feed through of past rand appreciation. The current account deficit will narrow this year but should widen thereafter as imports outpace exports.

Although Slovenia moved out of recession already in the second quarter of 2009, the precipitous decline in the previous two quarters was severe enough to give a year-on-year output fall in 2009 of close to 8%. A mild rebound has been occurring and is expected to continue through 2010, driven by external demand, before growth strengthens further in 2011 on the back of stronger investment. Inflation should remain moderate due to the negative output gap and high unemployment. Private consumption will be adversely affected by rising unemployment but should progressively recover with more dynamic wage developments in the private sector at the end of the projection period.

Economic activity rebounded in the second quarter after the sharp falls earlier on. Notwithstanding continued positive growth in the third quarter, annual GDP is expected to fall by close to 6% in 2009. Activity will gradually pick up in 2010 owing to a brighter outlook for world trade growth and a resumption of inflows of foreign direct investment, and growth should reach an annual rate of above 4% in 2011. The strong increase in unemployment is expected to gradually level off. With substantial slack in the economy, consumer price inflation is expected to remain fairly low.

After an initial sharp rebound from the deep recession of the past year, real GDP is projected to converge towards its potential. The decline in inflation seen since early 2009 is expected to continue into 2010 before flattening out. The current account surplus will increase in 2010 as a result of terms of trade gains, but it will decline in 2011 as import growth strengthens again. Net private capital flows should strengthen, allowing a rebuilding of reserves.

Growth resumed in the second quarter of 2009, but will remain subdued as private sector deleveraging constrains the recovery. As a result, unemployment is likely to increase to around 10% in 2010. The budget deficit is set to rise further in 2010 and 2011, following a substantial increase in 2009 due to the combined impact of the fiscal stimulus and the recession. Core inflation, after dropping to near zero, may increase rather slowly over the projection period.

Despite the deep OECD-wide recession, the Polish economy continued to grow in 2009 due to several factors, including: monetary easing; exchange rate depreciation; relatively limited dependence on international trade; a sound banking sector and unleveraged private sector; tax cuts and other fiscal measures; and infrastructure investments linked to EU transfers and the 2012 football championship. Activity is projected to pick up, mainly driven by fixed investment, but to remain well below potential rates for some time. While headline inflation was, until recently, above the official target, it is expected to diminish steadily as economic slack increases. The general government deficit is projected to reach levels that are unprecedented since the beginning of the transition process, but no fiscal consolidation measures have been announced for 2010 by the authorities. The constitutional public debt limit of 60% of GDP is being dealt with mainly through an ambitious privatisation programme. This will nevertheless only delay the much needed consolidation of public finances until 2011. The monetary authorities should refrain from any interest-rate increases unless circumstances change.

Economic recovery has already started in Norway, with the large fiscal and monetary stimulus boosting consumption and sustaining employment. The rebound in house prices is a sign that this stimulus is encouraging households to spend rather than to consolidate their balance sheets. Growth in private investment will resume next year, once consumption growth is well established and credit markets return to normal. Unemployment has barely increased, partly thanks to specific government measures, but also because of a reversal of migration flows, though the size of the latter is not known with certainty. Given the large deviation from the “4% rule” in 2009 and 2010, sizeable subsequent tightening of the fiscal stance is desirable for both macroeconomic management and medium-term fiscal sustainability. Monetary policy tightening has already started and should continue for some time, as the economy recovers, the labour market tightens and inflation expectations edge up. Policies to improve public spending efficiency should be pursued further, helping fiscal consolidation for the years to come.

New Zealand is finally emerging from its five-quarter long recession, the beneficiary of strong domestic and global policy stimulus. Recent indicators, notably improving business production expectations and retail sales, suggest that the third quarter is on track to register modest positive growth. But the recovery could be hampered by the overhang of high private sector indebtedness, ongoing credit contraction, the currency’s recent strength and rising unemployment. Unemployment is rising markedly and, as a lagging indicator, will continue to do so. This may hold down incomes and, along with the need to unwind the burden of household debt, raise the propensity to save.

After a sharp recession, the economy looks set to grow again on the back of a recovery in world trade, fiscal stimulus and easier monetary conditions. However, growth will be too weak to prevent further increases in the unemployment rate, one of the lowest in the OECD, until the end of 2010. As companies need to restore profitability they will continue to shed workers throughout 2010. The resulting improvements in profitability should lay the foundation for renewed investment growth and hence a more durable recovery in 2011. The fiscal stimulus has contributed to a budget deficit around 4.5% of GDP in 2009. To restore fiscal sustainability, the government should pursue its consolidation plan set to start in 2011. The planned two-step increase in the retirement age will help meet this objective but would be more effective with a phased-in implementation. Further focus on active labour market policies and easing of labour protection legislation would help stimulate employment growth.

Mexico has suffered its most severe recession since the 1994 currency crisis. Real GDP fell by 9.7% year-on-year in the second quarter of 2009, reflecting lower oil prices and lower exports, the outbreak of influenza and declining tourism revenues and worker remittances. Supported by the rebound in oil prices and increasing exports to the Unites States, the fall in activity slowed down and activity is now starting to recover. As monetary and fiscal stimulus are gaining traction, the recession is projected to bottom out in the third quarter of 2009 and GDP growth should rise gradually in 2010. The central bank has reduced the policy rate from 8.25 to 4.5% since February 2009 and the government implemented a fiscal stimulus package amounting to around 1.6% of GDP. Going forward, the central bank will have littleroom for further monetary easing as inflation is projected to remain close to the upper bound of its inflation target range. The automatic fiscal stabilisers should be allowed to work freely in 2010, but the fiscal stimulus should be gradually withdrawn if the recovery takes hold as projected. Consolidation measures proposed by the government to contain revenue shortfalls are necessary to avoid adverse financial market reactions.

The economy has been hit severely by the international financial crisis through its exposure to financial services and trade. The number of people on active labour market programmes has risen. However, the fall in output has been partially absorbed by an increase in the number of workers on reduced work time, from near zero before the crisis to 2.8% of the labour force in August. There are signs that activity has bottomed out, however, thanks to stronger equity markets and policy support. Further ahead, gradual recovery will be sustained by improving financial conditions and growth in world trade.

Following the severe contraction in late 2008, Korea has achieved one of the earliest and strongest recoveries in the OECD area, led by exports and expansionary fiscal policy. While the impact of fiscal stimulus will fade in 2010, a sustained pick-up in exports is projected to help boost output growth to 4 to 4.5% in both 2010 and 2011, with a rebound in domestic demand and a marked fall in unemployment.

The severe recession triggered by the global crisis has bottomed out, thanks in part to a rebound in exports, although production remains well below capacity. In addition, fiscal stimulus is partially offsetting the impact of falling employment and wages on domestic demand. Growth is projected to pick up gradually to around 2% in 2011, due in part to the new government’s plan to increase public spending. Nevertheless, the unemployment rate is likely to stay around 5.5% through 2011 and deflation will persist.

The severe recession in Italy started earlier than elsewhere but activity rebounded in the third quarter. Improved financial conditions have helped rebuild confidence and bolster domestic demand. The saving ratio, estimated to have risen substantially in 2009, is projected to fall back only slightly; consumption will be a more significant factor in growth during 2011. Further support to exports will come from the recovery in world trade. Higher unit labour costs, despite some falls in wage costs, and the oil price upturn will moderate the decline in inflation, even as unemployment rises somewhat further.

Positive growth in the second quarter of 2009, albeit slight, has marked the start of recovery. Expectation of indirect tax increases prompted a burst in car sales. Also, government spending increased rapidly, reflecting a pick-up from previously constrained expenditure. Growth rates of non-durable consumption, investment and exports all turned positive. Economic activity is expected to pick up throughout the projection period. Underlying inflationary pressures are likely to remain muted, but the risks are on the upside.

The economy is experiencing a severe recession as large domestic imbalances correct, but there are recent signs that the pace of contraction is slowing. Ireland should benefit from the world trade upswing along with restored competitiveness as a result of the decline in wages and prices. The ongoing domestic adjustment will nevertheless be prolonged, and the economic recovery weak.

GDP growth picked up significantly in the second and third quarters of 2009. Private consumption was the main driver. Investment rebounded strongly in the third quarter, but it continues to suffer from a dearth of credit. Exports are growing faster than imports, sustaining the trade and external current account surpluses. Inflation fell rapidly in the first semester. Activity is projected to gather some further impetus, buoyed by rising investment and easing credit conditions.

The Indian economy has weathered the global downturn relatively well. After slowing sharply in late 2008, growth recovered during the first half of 2009 and recent high-frequency indicators suggest that momentum is strengthening. In the near term, the ongoing recovery will be only modestly hampered by poor monsoon rainfall. Growth is projected to reach over 7% in 2010 and 7.5% in 2011. Inflation has been rising since mid-2009 and is expected to remain high over the projection period.

The recession into which the Icelandic economy fell following the failure of the country’s three main banks in October 2008 continues. Domestic demand has fallen sharply, and the economy is projected to continue shrinking until early 2010. Thereafter, growth is projected to return, boosted initially by the expected normalisation of financial conditions and subsequently by investment in large energy-related projects. The unemployment rate is likely to rise to around 7% by mid-2010 and edge down thereafter. The government programme will help to narrow economic imbalances, with inflation falling to about 2.5% by 2011 and the current account deficit declining to 1.5% of GDP in 2011.

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 contracted in 2009 as the effects of the global crisis gradually spread to the Greek economy. Economic activity is projected to contract somewhat further in the last quarter of 2009 and early 2010, as domestic demand continues to decelerate in the face of tight credit conditions and weak sentiment. The recent improvement in the external environment should help activity to pick up slowly, and growth could gather momentum in 2011. The unemployment rate is set to reach a double-digit level over the projection period. The current account deficit is likely to remain high.

Following the sharp decline in the first quarter of the year, real GDP increased in the second quarter, helped by the temporary surge in private consumption growth in response to stimulus measures. The recovery continued in the third quarter on account of an improvement in world trade and stock-building. Going forward, the improvement in activity could be relatively slow, especially through to mid-2010. Unemployment remains unusually low, not least due to the government-sponsored short-time working scheme which allows firms to reduce labour input without layoffs. While unemployment is projected to increase rapidly during 2010 the total employment loss will be mild compared with the depth of the recession.

After falling by 2.2% in 2009, real GDP is projected to grow slowly, by 1.4% in 2010 and 1.7% in 2011, led by business investment and exports. This will not be enough to prevent the unemployment rate from rising until the beginning of 2011, resulting in inflation of below 1% per year. Households have reacted to rising job and financial-market uncertainty by increasing their saving, offsetting the positive impacts of higher public transfers and improved terms of trade.

Output continued to decline in Finland over the first half of the year, as the collapse in exports deepened. However, a recovery should get underway by the end of 2009 with a bounce in exports from the current very low levels and substantial restocking. Harmonised inflation has remained above the euro area average due to large negotiated wage increases. The unemployment rate has climbed sharply, and is expected to continue to rise, magnified by significant labour market rigidities.

The sharp contraction in euro area activity appears to have ended sooner than anticipated, with further improvements in financial conditions, fiscal stimulus measures and stabilisation of export demand. However, headwinds from financial sector deleveraging and rising unemployment suggest that the recovery will be gradual. Bank lending standards are tight, credit growth to households and firms is weak and property prices are declining in many countries. Despite the improved outlook, core inflation should continue to moderate until the end of 2010 due to substantial economic slack.

Real GDP is projected to fall by 14.4% this year, to broadly stabilise in 2010 and to recover in 2011, when growth of 3.9% is expected. This projection depends largely on developments in major export markets, on the speed with which resources are reallocated toward expanding export activities and on the country’s ability to attract renewed foreign direct investment inflows to the export sector as the recovery takes hold.

The Danish economy was hit hard, if belatedly, by the global economic crisis but is projected to recover gradually as world trade regains momentum and as support is provided by the large automatic stabilisers, substantial fiscal easing and low interest rates. Private consumption fell very steeply in late 2008 and early 2009 but less so subsequently, as it is being supported by tax cuts, withdrawals from the special pension scheme and less depressed equity prices. Sentiment is up in manufacturing and industrial production seems to have stabilised at a low level, while the number of new bankruptcies is coming down.

Falling investment and recession in major export markets contributed to a sharp downturn at the beginning of this year. Real GDP turned slightly positive in the second quarter, largely due to a pick-up in exports and continued, albeit weak, consumption growth. A gradual recovery is projected for 2010 and 2011, driven by stronger investment and export demand, though weak consumption will act as a drag on growth. Inflation has been negative during part of 2009 but is expected to rise gradually to about 2% in 2011.

Vigorous growth has resumed in China, thanks to a very large monetary and fiscal stimulus. Momentum picked up in the second quarter and annual GDP growth is projected to exceed 8% in 2009 and 10% in 2010, before easing slightly in 2011 as the impact of the fiscal stimulus ends. The strong increase in domestic demand stemming from the stimulus has drawn in imports, while exports have been weak and may not recover to pre-crisis rates. As a result, the current account surplus is set to fall sharply to 5.5% of GDP by 2010 before rising somewhat in 2011, as domestic demand growth eases. Inflationary pressures are likely to remain subdued.

As a small open economy with a strong dependence on mining and agricultural exports, Chile has been hit hard by the collapse in world trade and commodity prices. Output has fallen sharply and annual average growth is projected to be negative in 2009. However, a good part of the earlier fall in copper prices through end 2008 has been reversed since and activity bottomed out towards mid-year with support from a substantial macroeconomic stimulus. Growth is set to accelerate gradually through 2010 to reach rates above potential in 2011.

The contraction that began in the last quarter of 2008 seems to have ended in the second half of 2009. External demand and domestic investment now appear to be rebounding, but they also pose the greatest risks to the recovery’s sustainability. Unemployment is projected to keep rising until the end of 2009 and underlying disinflation to continue for several more quarters under the weight of persistent slack.

GDP grew in the second quarter, following a decline in the previous two. Activity rebounded robustly on the back of resilient private consumption and an ongoing recovery in industrial production, which had contracted sharply in the previous months. Capacity utilisation is approaching pre-crisis levels in a number of manufacturing sectors. Investment has nevertheless yet to recover. Domestic demand is set to grow vigorously in the last quarter of 2009 and into 2010, supported by a still accommodative policy mix.

The economy embarked on a slow recovery during the second half of 2009, supported by fiscal and monetary easing and an acceleration in world trade. Consumer confidence and business sentiment have improved, albeit from some of their lowest levels on record. Growth will not suffice to prevent further increases in unemployment until mid-2011, which is likely to push up the already high level of structural unemployment.

In 2010, Austria is expected to recover from its worst recession in decades thanks to the improved external environment and supportive policies. If these conditions continue to prevail, growth should accelerate to its potential in 2011. Nevertheless, unemployment is set to increase until end-2010 and inflation, while inching up, will remain subdued.

Having been less affected by the crisis than most other OECD countries, Australia is likely to experience a relatively more robust recovery. Large public transfers and tax incentives stimulated private consumption and capital expenditure by firms. In addition, strong imports by China and other dynamic Asian economies buoyed exports of mining products. Growth is projected to pick up to 2.5% in 2010 and 3.5% in 2011, with unemployment peaking at around 6.25% in 2010 and inflation moderating.

The global crisis has pushed South Africa into recession. Growth will likely be negative in 2009 before recovering in 2010, when policy stimulus, global recovery and the staging of the soccer World Cup will boost activity.

Slovenia is experiencing the worst crisis since independence, as GDP is expected to contract by about 6% in 2009. A weak rebound should occur in 2010 as exports pick up. Inflation will continue to moderate on the back of a rising output gap and higher unemployment.

Recession is now under way, due largely to high exposure to international trade, but it is being tempered by the relatively mild difficulties in domestic financial markets and the absence of a house-price bubble.

GDP growth slowed in the first quarter of 2009 to 4.4% on year-on-year basis from 5.2% in the previous quarter. A weakening in investment was only partly offset by rising consumption and especially government spending.

Real GDP is set to fall by around 14% this year and by a further 1% in 2010. Although a weak recovery will begin next year, the resumption of growth could be threatened if recovery in major export markets is delayed and will depend largely on success in shifting resources from serving domestic demand, which has collapsed, to expanding export activities.

Economic activity is projected to contract in 2009. The world economic crisis has hit Chile mainly through a deterioration in its terms of trade, as copper prices have fallen sharply, and through tighter financial conditions.

Russia is suffering a severe recession, but the rebound in commodity prices and the expected effects of policy stimulus point to some recovery through 2009 and into 2010. If oil prices remain around recent levels the current account will remain in surplus and net private capital outflows will ease, allowing the exchange rate and foreign exchange reserves to consolidate their recent recovery.

There has been a pause in India's long economic upswing, with GDP growth having fallen well below potential by late 2008. The government introduced some new stimulatory fiscal measures at the beginning of 2009, following a sizeable increase in public outlays in 2008.

The Chinese economy is now rebounding strongly from the slowdown in the autumn of 2008, thanks to sizeable monetary and fiscal stimuli. Real GDP growth is projected at 7.7% this year and 9.3% in 2010, with some rebalancing towards domestic demand.

Following a further deceleration in the first quarter, activity now appears to be rebounding. Industrial production is expanding, in part due to previous destocking, especially in the sectors that have benefitted from government support, including the motor industry.

The economy contracted beginning in early 2008 as falling domestic demand compounded the effects of the international downturn. GDP is expected to decline by nearly 6% in 2009, before recovering in 2010. The large output gap will push inflation back down to the target range.

The sharp downturn of economic activity is expected to continue throughout 2009, reflecting the fall in world trade. A slow recovery in the course of 2010 will be led by gradually improving exports, notably to East Asia.

The Swedish economy is facing a deeper contraction than during the domestic banking crisis of the early 1990s. Output is projected to fall sharply in 2009 before recovering gradually in 2010, with the unemployment rate exceeding 11%.

Output is projected to fall by 4.2% in 2009, with the rate of decline slowing as the year progresses, and by 0.9% in 2010. The unemployment rate will reach about 20% in 2010, and inflation will fall to near zero.

After several years of exceptionally high growth, GDP is expected to contract this year. Exports will be the main drag on activity, followed by private investment. Growth is projected to recover slowly during the course of 2010 due to a brighter outlook for world trade.

Portugal is in the midst of a deep recession as the collapse of external demand and tight financial conditions have affected all parts of the economy, particularly exports and investment. Activity is expected to contract throughout 2009, before recovering very slowly in 2010 as the global economy and financial conditions gradually improve.

Growth slowed in the second half of 2008 but was still positive in early 2009. Given the global downturn, activity is projected to contract in 2009, though the recession should be relatively shallow, notably due to relatively modest trade dependence, historically low interest rates, moderate indebtedness of the private sector, income tax cuts and the implementation of many infrastructure projects related to transfers of EU funds and the 2012 football championships.

Norway has been hit hard by the global economic downturn, even if the decline in output is projected to be less sharp than in other countries. The export sector is severely affected, and domestic demand, mainly investment, is contracting rapidly.

The global crisis hit New Zealand just as it was undergoing a difficult domestic adjustment. The multiple blows of housing market correction, collapsing world trade, rising risk spreads, tighter credit conditions and unsustainably high private-sector debt suggest a recession of atypical length.

The economy underwent a strong contraction at the end of 2008 and in early 2009 as exports and private investment collapsed. However, unemployment has only recently started to increase, from a low level.

Mexico entered recession in late 2008, and growth had turned highly negative by the first quarter of 2009, as both exports and domestic demand contracted in the wake of the crisis. The outbreak of influenza and continued troubles for auto manufacturers are likely to have contributed further to the downturn.

The international crisis hit the economy towards the end of 2008. Initially, the financial sector was affected, but the collapse in world trade also hurt the export-dependent manufacturing sector, and GDP is set to contract during 2009.

Output growth was positive in the first quarter of 2009, following the severe contraction in late 2008. Nevertheless, the unemployment rate has risen significantly, inflation has decelerated and the current account surplus has increased sharply.

The economy is experiencing a severe contraction as large domestic imbalances correct, compounded by the global downturn and financial crisis. With the recession already well entrenched and further contraction expected, the peak-to-trough fall in GDP is set to reach 14%.

Domestic demand collapsed following the failure of Iceland's three main banks in October 2008, plunging the economy into a very deep recession. The economy is projected to shrink until early-2010, when it should be buoyed up somewhat by investment in large energy-related projects.

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.

Growth weakened in 2008 under the weight of the global economic crisis, despite a sound financial sector and sustained domestic demand. Activity is expected to contract in 2009 on the back of weakening exports, and to recover only slowly in 2010 as the external environment improves.

Economic conditions in Finland deteriorated abruptly through the winter. Falling exports explain the major part of the decline in GDP although destocking, household consumption and dwelling investment also contributed.

The Danish economy is currently experiencing its worst recession in over four decades. The downturn, which started with the unwinding of the property boom, has now been compounded by the trade and financial effects of the global economic crisis.

Real GDP is contracting, largely reflecting a specialisation in export-dependent manufacturing. Falling investment and recession in major export markets are contributing to a sharp downturn this year, followed by a weak recovery in 2010, driven by the gradual pick-up of private consumption and export demand.

The economy is expected to continue to contract in the remainder of 2009, before a relatively slow recovery emerges in 2010 on the back of fiscal stimulus, easier monetary conditions, and a recovery in world trade.

Owing to the global crisis, Austria has entered the most severe recession in decades. GDP is set to contract in 2009, resulting in an increase in unemployment and low inflation. The unemployment rate increased to 4.2% in April 2009, from 3.7% a year before.

The international crisis has not spared Australia, even if its impact will be less severe there than the OECD average. Weaker foreign demand and its repercussions on the domestic economy are expected to pull down GDP by 0.4% in 2009, followed by growth of only 1.2% in 2010.

The sharp contraction that began in the last quarter of 2008 intensified in the first quarter of 2009, led by collapsing exports, fixed investment and stock building. The pace of contraction appears to be slowing, but recessionary conditions are expected to linger through the third quarter, with only a slow recovery thereafter.

The economy is in a severe recession, with output projected to decline by 4.3% in 2009 and recover only mildly in 2010. The financial crisis has severely impaired the supply of credit and house prices have fallen sharply, thus restraining business and household spending.

The recession is projected to continue into late 2009, with a slow pick-up in 2010. Falling export growth and deteriorating financial conditions have hit investment hard.

Real GDP is projected to fall by about 3% in 2009, with the pace of contraction gradually diminishing through the year. The recovery in 2010 is likely to be slow, with output growing below potential rates throughout the year.

The fall in output accelerated at the beginning of 2009 and activity is expected to continue falling throughout 2009, though at a slowing pace. The annual decline in GDP growth is projected to amount to around 6% this year. Activity will slowly pick up in the course of 2010.

The euro area is in a deep recession, with external demand collapsing and domestic demand being weakened by tight financial conditions, rising unemployment and heightened uncertainty.

The global crisis triggered a deep recession that is likely to be the most severe in Japan's post-war history. The contraction in world trade led to a sharp plunge in exports and business investment, while falling employment and wages have reduced private consumption, leading to a projected output decline of almost 7% in 2009.

The US economy is going through a severe and protracted recession which is projected to bottom out later this year, as fiscal and monetary support takes hold and the housing cycle levels out. In 2010, even after a recovery gets under way, GDP growth is likely to remain weak because of the slowdown in capital accumulation, negative wealth effects and still adverse, albeit improving, financial conditions.

Korea was one of the OECD countries most severely affected by the global crisis, even though its financial sector had been relatively healthy.

The US economy is facing extremely difficult conditions. The financial crisis has intensified at a time when growth had already been weakened by the prolonged housing downturn. A credit crunch is likely to result in a pronounced contraction in activity over the near term and a further deterioration of the labour market.

External shocks from the run-up in commodity prices and then international financial turbulence have brought Japan’s expansion to an end. Equity prices have plummeted and the yen has appreciated substantially. With falling exports, activity is projected to remain weak through 2009, pushing up unemployment and reducing headline inflation to near zero. A recovery in domestic demand is projected to lift output growth to around 1% during 2010, still short of the growth of potential.

The euro area economy has slipped into recession this year, with tighter financial conditions, negative wealth effects, weaker housing market activity and greater uncertainty all reducing domestic demand. Growth is expected to remain below potential until the middle of 2010, before picking-up as the effects of monetary policy easing and the dissipation of stress in global financial markets emerge. Lower commodity prices and the emergence of a sizable negative output gap as production slows below potential will dampen inflationary pressures, with headline inflation projected to fall to around 1.5% during 2009.

After a strong start into 2008, activity has contracted reflecting muted consumption and weakening export growth. Activity is projected to contract further in 2009 on the back of falling investment spending and weakness in the main trading partner economies. Private consumption will make a small positive contribution to growth because disinflation increases the purchasing power of past wage settlements. Activity is expected to pick up in late 2009 and return towards trend growth rates in the second half of 2010.

Growth is likely to fall below 1% in 2008 as a whole amid sharply deteriorating global economic conditions in the latter part of the year, due primarily to the financial crisis. The impact of this turbulence will reverberate well into 2009, with negative growth expected until the middle of the year, followed by a gradual pick-up of activity to above potential rates by mid-2010.

The recession in Italy, which began early this year, is likely to extend through much of 2009, as in many other OECD countries. Global financial turmoil hit an economy already weakened by several years of low productivity growth, deteriorating competitiveness and high public debt, though solid job creation and falling unemployment had been bright spots. Recovering confidence towards the end of 2009 should allow output to accelerate significantly during 2010.

The economic downturn that started in 2007, as exports slowed in response to the deflating US housing bubble, continues to worsen. Sharply deteriorating conditions in global financial markets, generalised softness in the US economy and receding commodity prices are amplifying export weakness and dragging down domestic spending. Output has been contracting since August 2008, and slack is projected to grow until the global financial crisis has run its course and external demand bounces back in 2010. The domestic banking and housing sectors are in relatively good shape, however, and no government bail-outs have taken place.

Economic conditions have deteriorated markedly and forward-looking indicators suggest a further sharp weakening in activity over the next quarters. The adjustment in the construction sector is expected to continue, while house prices are likely to fall further. These factors, combined with turmoil in the banking and financial sectors, are already cutting domestic demand. Growth may resume only in late 2009. Unemployment is set to rise rapidly, but should stabilise in 2010. Inflation should recede, reflecting the recent falls in energy and food prices and the increasing output gap.

GDP growth could well weaken from 2.5 % in 2008 to around 1.75 % in 2009 before picking up to 2.75 % in 2010. This would still imply that, despite the depressed international environment, the impact of the financial crisis and the fall in the terms of trade should be relatively contained. Unemployment is likely to increase, however, and inflation may dip below 3% in 2010.

Largely as a result of a worsening external environment, growth has declined and the economy is set to contract in 2009 before recovering in 2010. Headline inflation is projected to ease as energy and food prices fall, economic slack increases and import prices decelerate.

Activity is projected to contract slightly and, thereafter, growth may remain below potential well into 2010, before rebounding on the back of easier monetary conditions, renewed growth in real incomes and a recovery in world trade. As a result, unemployment will increase over the projection period. Headline inflation should decline with the fall in energy and food prices, although core inflation should show more persistence.

Growth slowed in the first half of 2008 and is not expected to return to trend again until 2010. The slowdown started with weaker domestic demand in 2008, as the inflation spike eroded consumers’ purchasing power, and will continue as export market growth slows. The rebound is projected to be driven by both private consumption and exports. Inflation is expected to decelerate substantially in 2009 as the impact of one-off government measures wears off and global energy and commodity prices fall.

After years of strong expansion, the construction boom is now over and falling house prices have put an end to debt-financed consumption growth. As the impact of global financial turmoil materialises, exports are likely to remain weak during 2009, leading businesses to cut back investment.

Economic activity has slowed substantially, mainly due to a decline in investment. Output growth is projected to be subdued in 2009, before recovering during 2010. Unemployment is likely to drift up during 2009, but should stabilise in 2010. Lower commodity prices and growing slack in the economy should bring down inflation from the current high rate.

Economic activity has already weakened due to slowing domestic demand. Growth is expected to be subdued until mid-2009 in the context of a sluggish external environment, but to firm gradually thereafter. Inflation is set to decline, but the persistent differential with the euro area is likely to remain.

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.

After a long period of unbalanced growth, the Icelandic economy has entered a deep recession following the failure of its major banks. The economy is projected to shrink until early 2010 and unemployment to soar over the next two years. Following a large depreciation of the currency, inflation is projected to spike higher, though to fall back sharply once the exchange rate effects have passed through and the effects of substantial economic slack come to bear. The current account deficit should decline markedly.

Activity is contracting as the severe housing market correction has weakened the wider economy, and the weakness will persist well into 2009. Growth will recover in 2010 as the housing construction cycle bottoms out and the financial turmoil wanes.

Korea has been hit hard by the global financial crisis and the earlier commodity price shock, which together ended the expansion and pushed up inflation. Sharp depreciation of the won since mid-September has further clouded the economic outlook. Growth is projected to fall to below 3% in 2009 and then pick up gradually as the world economy improves.

The international financial crisis is sharply reducing economic growth, initially in the financial sector, but subsequently in broader domestic demand. These effects should persist into 2010. Consequently, unemployment will rise further, while core inflation will fall slowly.

Economic growth is set to fall well below potential in 2008 and 2009, before gradually recovering in 2010. The weak US economy and a fall in oil production will cut exports over the next several quarters, while the effects of the financial turmoil will depress domestic demand growth. Activity will recover through 2010 as global economic conditions improve. Inflation will return to near the target rate as commodity prices fall, activity slows and monetary tightening keeps expectations anchored, although the recent sharp depreciation of the peso will put upward pressure on prices.

After coming to a halt in mid-2008, growth will turn negative in 2009. The following year a recovery will get under way as stronger domestic demand is underpinned by easier monetary policy, real income growth is supported by lower inflation, and exporters benefit from stronger world trade. However, a tight labour market will create some persistence in core inflation.

New Zealand has entered recession ahead of other OECD countries, a victim of simultaneous domestic and foreign shocks. The outlook remains subdued because the large macroeconomic imbalances built up over the past decade–inflation, housing overvaluation, high household debt and a huge current account deficit–will take some time to unwind.

After the remarkable performance of the past few years, the Norwegian economy is now slowing toward its potential rate of growth. Domestic demand is moderating as a result of the increased cost of borrowing, falling house prices and declining terms of trade. Inflation remains higher than desirable and rising labour costs are undermining competitiveness. The off-shore (oil and gas) sector will continue to support mainland demand through spill-over from oil investment.

The pace of expansion decelerated moderately in the first half of 2008 and recent data point to a further weakening of activity. Amid the global slowdown, growth is projected to fall below potential, although income tax cuts should support private consumption. With declining oil prices and persisting, albeit abating, demand pressures in labour and product markets, core inflation is expected to subside more gradually than headline inflation.

Economic activity moderated in the first half of 2008, as investment and export growth softened. In line with the recent intensification of the financial crisis and expectations of a significant slowing in Portugal’s export markets, activity is expected to contract until the second half of 2009, before recovering slowly in 2010. The unemployment rate is set to increase from its already high level. The sizeable negative output gap and lower food and energy prices will reduce inflation.

Although the Slovak Republic will continue to maintain the highest growth rate among OECD countries over the next two years, activity is expected to decelerate significantly in 2009. In particular investment spending and trade growth are likely to be adversely affected by the effects of the financial crisis. Growth is envisaged to return to close to its potential rate towards the end of the projection horizon. Inflation rates should decline from their currently high levels, but to stay above euro area levels.

GDP is projected to fall in 2009, as residential construction continues to contract, before recovering modestly in 2010. Unemployment will continue to increase substantially. Inflation should recede as a large negative output gap opens up and commodity prices moderate, while falling imports should significantly reduce the current account deficit.

The Swedish economy stalled in the first half of 2008 and is expected to weaken in the near term, as the effects of the international financial crisis take their toll. Consumption is projected to pick up late next year as the turmoil subsides and thanks to further income tax cuts and lower interest rates. Export growth should gradually recover as Sweden’s export markets expand again. Residential investment is expected to contract, with weaker house prices and confidence compounding unfavourable demographic patterns. Employment and labour force participation are both expected to decline, and labour productivity growth is expected to remain weak in the coming quarters.

Economic activity is expected to contract somewhat in 2009, due to poorer export prospects and a diminished contribution of financial services, followed by a rebound in 2010 as global financial market turbulence abates. Inflation is projected to fall back to 1%, reflecting lower oil prices, the opening of an output gap and wage moderation. A further reduction in policy interest rates may be needed, but monetary policy stimulus will have to be withdrawn in the course of 2010. Fiscal policy should allow automatic stabilisers to operate.

The economy slowed in 2008 as weakness in domestic demand was compounded by the international slowdown in the wake of financial market turbulence. Growth is expected to decline to below 2% in 2009 before recovering to 4.2% in 2010, in line with the global recovery.

The expansion that gathered pace during 2007 was sustained in the first half of 2008, although activity appears to be slackening owing to a worsening of financial conditions. Domestic demand has been the main driver of growth. The trade surplus is shrinking, essentially due to buoyant demand for imports, and the current account has shifted into deficit. Dynamism in the labour market continued to deliver robust job creation. Inflation picked up considerably through mid-year.

GDP growth has fallen, from a peak of nearly 12% to a pace in the high single digits. Export growth is weakening and, with slower capital formation, domestic demand is also projected to ease in 2009, before recovering in 2010. Disinflation is on course to continue, in part due to moderating commodity prices but also reflecting slower output growth.

Growth has continued to slacken to under 8% by the second quarter of 2008. Inflation is high, driven by commodity prices, but the peak appears to have passed. The current account deficit has risen substantially and there is downward pressure on the exchange rate. The economy is projected to slow further over the next year and to recover in tandem with the world economy in 2010.

The fall-out from the global financial crisis will sharply reduce real GDP growth in Russia through 2009, with a pick-up expected in 2010. With a reversal in the substantial rise in oil and metal prices, the pattern of terms of trade gains fuelling rapid growth in domestic demand has come to an end. Inflation has risen strongly, but may now have peaked and should decline in 2009-10. Fiscal and current account balances are expected to worsen sharply.

After several years of robust expansion, activity is projected to moderate and inflation to recede. The slowing world economy, tighter financial conditions and lower investments in mining and energy will all slow growth. Inflation will decline gradually as second-round wage increases from high commodity prices wear off and expectations are reanchored to the central bank’s target. Past current account surpluses have disappeared as copper prices have retreated from high levels.

Strong domestic demand continued to underpin growth in the first half of 2008. Investment was particularly robust. Imports are growing faster than exports, but the trade and current accounts are still in healthy surpluses. Inflation rose substantially following a hike in regulated domestic fuel prices in May.

Global financial turmoil is deepening the slowdown, with the pace of economic activity not expected to pick up substantially before the latter part of 2009. The central bank has already cut its policy rate in reaction to the crisis in financial markets.

Economic activity is likely to slow significantly in 2009, driven in particular by a sharp deceleration in investment in construction. The following year, economic growth should return toward trend as both fixed investment and private consumption recover. Headline inflation is expected to subside due to falling commodity prices, although planned public wage increases will exert upward pressure on core inflation.

This year’s economic slowdown is projected to continue, reflecting weaker consumption growth and worsening terms of trade. Real GDP growth is expected to fall to about 3% in 2009 before rebounding to above 4% in 2010, with the FIFA World Cup providing a fillip to activity. Inflation is expected to turn down, returning to the central bank’s target range in 2010, as a result of the monetary tightening over the past two years and falling food and energy prices. Current account deficits will remain large with lower export prices broadly offsetting weaker import volume growth.

Ireland has been the OECD’s fastest growing economy for several years, driven by strong consumer demand, fixed investment and a buoyant global demand in areas like IT, pharmaceuticals and financial services.

Healthy gains in private consumption have helped to keep GDP growth above trend so far this year. However, the correction in residential construction is likely to accelerate over the near term, and housing wealth could decline which, together with weaker labour market conditions, could lead to lower consumption growth over time. Real GDP growth should therefore slow to a pace below potential in 2008 and then recover in 2009, although there are considerable downside risks. Headline inflation has recently moved up, but core inflation seems to have stabilised near 2% and, assuming that energy prices level out, inflationary pressures should remain fairly moderate over the projection period.

The economic expansion–the longest in Japan’s post-war history–continues despite some deceleration in the pace of growth since early 2007. A further tightening of the labour market is projected to reverse the decline in wages, helping to sustain output growth of some 1.5-2% in 2008-09 and pushing inflation into positive territory.

The expansion has continued but at a slower pace than in 2006. Higher interest rates, a stronger euro and tighter credit conditions are all damping activity. But the outlook remains relatively good, with growth projected to return to its potential rate following some slight near-term weakening. Rising employment and a moderate upturn in wage growth will underpin household incomes and consumption. Inflation has veered up due to a sharp rise in energy and food prices, but is expected to decelerate to below 2%.

After slowing in the second quarter, growth has picked up in the third quarter on the back of strong domestic demand. The output gap is likely to be almost closed. Growth is projected to advance at near trend rates during 2008 and 2009. Following some near-term headwinds, unemployment may continue to edge down but at a much slower pace than in the recent past. The slower projected expansion largely reflects a diminishing contribution from net exports that is not fully compensated by stronger private consumption.

After slowing in 2007, growth is projected to average below 2% in 2008, with a weak first half but some rebound thereafter, and continuing at near potential rates in 2009. Job creation will continue, albeit at a slower pace, allowing for further slight declines in the unemployment rate. Following several years of budgetary consolidation, no further improvement in the budget deficit is expected, with a reduction in both revenues and spending in relation to GDP.

GDP slowed in the first half of 2007, as export growth weakened, rebounded in the third quarter but may weaken again in the fourth. Growth over the course of 2008-09 is projected at near its potential rate of just under 1.5%. Unemployment, which continued to fall through the first half of 2007, should decline further, but at a slower rate. The recent pickup in price inflation may persist into 2008 and 2009.

GDP grew at an above-trend pace of close to 3% through the first three quarters of 2007. However, growth is expected to be weaker in coming quarters, as both investment and consumer demand are likely to be damped by much weaker activity in the housing market, together with tighter credit conditions. Consumer price inflation has dropped sharply and is expected to remain close to the 2% target over the next two years.

The economy has been operating above its estimated production potential, but is expected to decelerate noticeably in the short term as lower external demand and the marked currency appreciation damp activity. Yet growth is likely to rebound quite rapidly once the effects of these international factors disappear. A slowing in commodityprice increases, the federal goods and services tax cut and the stronger Canadian dollar should contribute to a temporary decline in inflation.

Output growth, which could reach 4.25% in 2007, is expected to slow gradually to 3.5% in 2008 and 3% in 2009, a pace close to the potential growth rate. This slowdown, which will be accompanied by a further tightening of monetary policy to keep inflation in line with the Reserve Bank’s inflation target, should ease strains in the labour market.

A slowdown in net exports and investment is expected to result in GDP growth decelerating from almost 3.5% in 2007 to about 2.5% in 2008 and 2009. Headline inflation is projected to temporarily move above 2% in the short term on account of rising oil and food prices.

Real GDP growth has moderated from its recent robust pace and is likely to slow further towards the country’s potential rate in the short term, though leaving the output gap positive. Domestic demand continues to underpin expansion, boosted by higher employment and real incomes. Inflation is projected to increase somewhat in response to rising cost pressures.

A policy-driven spike in inflation in the first half of 2008 is going to temporarily dent otherwise healthy economic conditions, and real GDP growth will dip below potential as the increases in indirect taxation and administered prices squeeze consumption. Underlying inflation is low, but is creeping up and further tightening of monetary conditions is expected.

GDP growth has slowed, but the positive output gap remains large, with labour and capacity shortages evident. The inflow of workers from abroad has allowed employment to rise strongly. Nevertheless, wage growth is now gaining momentum, and loss of competitiveness is expected to weigh down on growth in the coming years.

Output grew by 5% in 2006, and strong growth has continued into 2007, underpinned by a robust export performance and sustained strength in consumption. While healthy employment growth is projected to continue, leading to a further decline in unemployment, output growth is expected to moderate.

Activity has been strong so far in 2007, despite the impact of forest fires and a slowing of housing investment towards a more sustainable level. Growth is set to weaken in 2008, before edging up to around 4% in 2009. Inflation is likely to rise in light of demand pressures and the current account deficit is expected to remain large.

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.

Expansionary government measures have rekindled demand and inflation pressures at a time when imbalances in the economy remain substantial. Still, tight monetary policy is expected to eventually succeed in slowing the economy, taming inflation and reducing imbalances. However, the slow and uneven adjustment process leaves the economy vulnerable to changes in foreign investor sentiment, especially in a context of fragile global financial market conditions, and has increased the risk of a harder landing of the economy.

Activity was strong in the first half of 2007, but the slump in house building will slow growth substantially. GNP is expected to increase by 3% in real terms in 2008, which is considerably below the growth rate of potential output, but to recover to grow at 4.5% in 2009 as housing construction levels out at a sustainable level. Inflationary pressures will ease, but unemployment is likely to increase.

An acceleration of domestic demand, combined with continued buoyant exports, is projected to keep economic growth at around 5% in 2008-09. Strong demand from other Asian countries is sustaining export growth at double-digit rates, despite the appreciation of the won, which has helped to keep inflation below the Bank of Korea’s target zone.

Growth was well above that in other European economies in 2007. Largely unaffected by the turmoil on international markets due to its strong position in the mutual funds sector, financial services continued to be the main driver of economic growth. Strong private investment and manufacturing exports also contributed to the expansion. The improved employment prospects spread from cross-border workers to residents, enabling a gradual reduction in the unemployment rate. Despite a loss in price competitiveness, the recovery is set to weaken only moderately and growth is likely to remain above potential growth through to 2009.

After a moderate slowdown in 2007, reflecting a weakening of external demand, GDP growth is expected to accelerate in the course of 2008 and reach 4.25% in 2009. The approval of the fiscal reform should boost business confidence, underpinning stronger domestic and foreign investment.

The economic expansion remained strong in 2007 and is expected to reach 3% for the second year in a row. Over the projection period above-potential growth is projected to continue, reflecting both robust domestic demand and dynamic export markets. However, labour shortages are likely to persist, partly reflecting population ageing, which will increasingly hamper the expansion of the economy. Indeed, inflation pressures are expected to increase gradually.

Activity so far in 2007 has picked up markedly in a context of unprecedented high prices for New Zealand’s major commodity exports, maintaining pressure on resources and inflation. Monetary conditions have been tightened, while domestic risk spreads have widened in conjunction with the international financial market turbulence. These factors should cause growth to slow over the near term, allowing a moderation of inflation and eventual monetary easing.

After a long period of robust growth, which continued unabated in the first half of 2007, there are signs that mainland Norway (i.e. non-offshore sector) is reaching the peak of the cycle with a large positive output gap. Tightening monetary conditions are beginning to exert a cooling effect and further expansion is made difficult by very high capacity utilisation. Some of the forces that kept price increases down are diminishing and inflation is now picking up slightly.

The first half of 2007 saw an acceleration of economic activity, driven by booming domestic demand. Growing labour shortages have fuelled strong wage increases. The pick-up in unit labour costs and record-high capacity utilisation rates have darkened the inflation outlook. Persistent strength in domestic demand should support growth, but the current account deterioration is projected to continue.

The expansion has become more broadly based in 2007. Following a period of buoyant export growth, investment is picking up. Growth is expected to strengthen further in 2008 and 2009, largely driven by domestic demand. The still large negative output gap should drive inflation down in 2009. Though gradually declining, unemployment remains high and, as a result, wage increases are set to be moderate.

Economic growth is projected to ease to 7% by 2009 as the rate at which new export-oriented manufacturing capacity coming on stream declines. Unemployment is projected to fall to about 9.5% in 2009. Further disinflation will be slowed by higher food prices, increases in indirect taxes and the assumed euro changeover in 2009.

Economic growth is likely to slow in 2008 and 2009, as residential construction falls. Private consumption may decelerate, reflecting lower employment gains and tighter credit conditions. From a peak in late 2007, inflation should decline as demand pressures moderate.

After posting very strong growth in 2006, the Swedish economy cooled during 2007, due mainly to weaker export growth. Domestic demand is expected to continue to grow markedly in the near term as strong employment growth and income gains should boost private consumption.

Economic growth is expected to slow to about 2% in 2008 and 2009, close to the potential rate, with a diminished contribution from net exports. Employment should continue rising, although unemployment may not fall much further. Inflation is projected to rise modestly, reflecting past oil price rises and a high level of capacity utilisation. The government budget surplus will decline.

The economy, which had slowed down earlier in the year as a result of monetary tightening in 2006 and political uncertainties in the spring, gained momentum after the summer elections. In the absence of shocks, growth should settle at around 6% in 2008 and 2009.

GDP growth picked up in the first half of 2007. Private consumption continues to support activity on the heels of strong credit increases and rising incomes. The expansion of investment has been particularly sharp. Export performance remains robust. But a vigorous pickup in imports, especially of capital goods and intermediate inputs, is beginning to weigh on the trade surplus. Inflation remains well below the central target, despite an uptick in mid-year on the back of food price hikes.

After moderating in the second half of 2006, economic growth has accelerated again and is expected to reach almost 11.5% in 2007, leading to a widening of the output gap. The inflation rate is projected to increase to around 4.5% in 2007 and stabilise thereafter as weaker food prices are estimated to offset accelerating non-agricultural prices. Despite continued strong export growth, output is likely to slow in 2008 and 2009 as imports accelerate. Nonetheless, the current account surplus is projected to rise from around $350 billion in 2007 to over $500 billion in 2009, passing from 11.25 to 11.75% of GDP.

The economy grew rapidly in the fiscal year (FY) 2006, expanding by 9.4%. Strong growth was fuelled by a good performance of the agricultural sector and continued strength of industrial output. In the first half of FY 2007, investment remained buoyant, leading to improvements in the supply potential of the economy. With higher  interest and exchange rates, output growth is projected to gradually slow to 8.4% by 2009. The current account deficit is likely to widen from 1.1% of GDP in FY 2006 to 2% by 2009. Inflation, as measured by the GDP deflator, is expected to ease back somewhat over the projection  horizon as increases in food prices moderate.

Real GDP growth is set to accelerate in 2007, before moderating over the projection period as oil and metal prices stabilise at their current high levels. Domestic demand will remain strong, but the exceptional rates of investment growth observed in the first half will not be sustained. Fuelled by relaxed monetary conditions and the tightening of the labour market, inflation is set to hit double digits at the end of the year and will, in any case, exceed the central bank target of 8% by a wide margin.