The economy has been soft recently. Household spending has advanced more modestly as higher energy prices have pinched real incomes. Yet business investment has stabilised and appears set to recover following the end of the war in Iraq, while rising military expenditures are providing a boost to demand. Growth is expected to rebound sharply by the autumn assuming the conflict is resolved by early summer. Household, business and foreign demand -- the latter buoyed by the drop in the dollar -- are all projected to strengthen markedly in 2004. Inflation should fall back as energy prices reverse and slack persists following several years of growth below potential.

Monetary policy has remained supportive, but interest rates will need to be raised once growth picks up. The proposed tax cuts and further increases in expenditure, not least the jump in defence purchases, will widen the federal government deficit sharply. This will have to be reversed in coming years. While the planned tax rate reductions and reforms to dividend taxation are attractive from an efficiency perspective, these proposed changes should be part of a more revenue-neutral reform package.

The economic expansion stalled in the second half of 2002 as a result of a slowdown in export growth. Although the outlook for domestic demand remains weak, a rebound in world trade growth in the second half of 2003 may prompt a mild recovery, with output growth of around 1 per cent in both 2003 and 2004. Such an upturn would be unlikely to reduce unemployment or the rate of deflation. Indeed, a possible strengthening of deflationary pressures poses a downside risk to the projection, as do continued financial sector fragility and the strains associated with a further rise in public debt.

Monetary policy should focus on ending deflation through further increases in liquidity. The accelerated resolution of non-performing loans, in line with the government's objective, should be a priority, accompanied if necessary by the direct injection of public funds. If the bad debt problem were addressed more aggressively, fiscal policy should allow the automatic stabilisers to respond to any negative effects on output and employment. But it is also essential to set out a medium-term fiscal consolidation framework incorporating targets for spending. The economy needs to be revitalised through an acceleration of corporate restructuring and the implementation of structural reforms on a broad front.

Output came close to stagnating in 2002. While fixed investment fell further and private consumption contracted, this was counterbalanced by continuing, albeit weak, export growth. With domestic demand having firmed somewhat at the turn of the year, the trough of the downswing might have been reached. But the economy seems likely to grow very slowly through 2003, as consumption and investment remain subdued and a significant pickup in exports is unlikely before 2004. Unemployment is set to remain high. As the upswing broadens in 2004, GDP growth is projected to pick up to around 1¾ per cent, slightly above potential.

The general government deficit totalled 3.6 per cent of GDP in 2003 and -- based on current legislation -- will remain above three per cent in 2003. Coherent expenditure reforms are required to reduce the structural deficit and raise the growth path of the economy. Furthermore, the slowing of the economic expansion reinforces the need for fundamental reform to make labour markets more flexible and improve incentives for work. The government has announced important measures designed to tackle these issues, and these should be implemented as soon as possible.

GDP grew by 1.2 per cent in 2002, with robust personal and government consumption offsetting a decline in investment and a sharp fall in inventories. Inflation pressures have reversed although unemployment is up only marginally. Output is projected to rise by only around 1¼ per cent overall in 2003, the product of weak conditions in the first half and an acceleration in the second half that should see the economy expand by more than 2½ per cent in 2004. Meanwhile, consumer price inflation should decelerate to around 1½ per cent in 2003, before stabilising.

Fiscal policy relaxed substantially in 2002 and the authorities expect the deficit to reach 3½ per cent of GDP this year. As a result, government debt is likely to rise to more than 60 per cent of GDP. Although measures in place should permit the deficit to fall in 2004, significant additional efforts will need to be made to restrain the pace at which expenditures rise if the authorities are to achieve their goal of reducing the deficit below 3 per cent of GDP.

Growth continued to be sluggish in 2002 because of flagging domestic confidence and weak export performance. A recovery is expected to begin only in the second half of 2003 and to gather strength in 2004, driven by low real interest rates, reviving confidence, and accelerating world demand. Inflation, as measured by the Harmonised Index of Consumer Prices, is expected to decelerate, stabilising at 1¾ per cent by the end of 2004.

Labour market liberalisation and wage moderation underpin an ongoing structural shift towards more labour-intensive production, but greater wage differentiation is desirable to encourage further the demand for low-skill labour. More public expenditure restraint will be needed in both the short and medium term to reduce the high tax wedge, while also allowing for a satisfactory pace of debt reduction. Total factor productivity growth is low and strengthening it will require policies to promote product market competition and innovation.

The UK economy has so far shown greater resilience in weathering the downturn than any other major European economy. An expansionary fiscal stance and a reduced drag from net exports should ensure a slight pick-up in growth this year, despite a slowdown in consumption. As business investment and exports revive, the output gap should begin to close in 2004 with inflation falling back to the official target.

The recent and prospective deterioration in the government financial balance is not an immediate cause for concern given the relatively low level of debt. The 'golden rule' is likely to be met over the current cycle, but with a worse starting position there will be a greater challenge in meeting it over the next cycle. The recent easing of monetary policy, while justified by signs of weakening domestic and international demand, may fuel the housing market and does nothing to reduce the risk of a sudden fall in house price inflation or even possibly an abrupt fall in the level of house prices.

After a very strong performance during most of last year, output slowed down markedly in the autumn, mainly because of faltering export demand. Output growth is likely to have remained weak through the winter, but the pause is expected to be fairly short-lived. Economic fundamentals are sound, and activity should pick up in the second half of this year if the US recovery accelerates as expected and the present uncertainties diminish. Even though the recent rise in inflation was partly due to one-off factors, price pressures are beginning to build.

The Bank of Canada will need to raise interest rates further this year and next in order to avoid overheating. The planned shift in the fiscal stance, due to a substantial increase in spending, increases these overheating risks. Even though the medium-term fiscal situation is still solid, the government will eventually need to control the underlying sources of spending pressures, particularly in the health care system.

Robust economic growth continued through the second half of 2002, despite sluggish exports that reflected the severe drought and the weak global economy. With the residential construction boom likely to peter out, GDP growth may slow somewhat in 2003, but then accelerate in 2004 along with the projected global recovery and higher farm output. Unemployment should fall further, with inflation remaining under control, given sizeable productivity gains and wage moderation.

To maintain price stability, monetary policy will need to become less accommodating once the drought effects have faded and signs of a global pick-up become clearer. The government should maintain its fiscal objective of keeping the budget balanced over the economic cycle. Longer-run growth prospects would be improved by further reforms in the areas of welfare, private pensions, education, competition and labour markets, to encourage more people to participate in the workforce, remain in employment, and further raise their productivity.

GDP growth weakened at the turn of the year, due to shrinking domestic demand. A gradual, export driven recovery is expected later in 2003. Meanwhile, rising unemployment will continue to depress household confidence while investment plans are held back by international uncertainty. Growth can be expected to pick up later this year and into 2004 as high growth in neighbouring accession countries impacts positively on growth in Austria and fiscal policy offers some support.

By allowing the structural deficit to deteriorate by ½ per cent of GDP in 2003 the new Austrian government is giving less priority than its predecessor to maintaining a balanced budget. The scheduled tax reductions for 2004 and 2005 will be partly debt financed and may act pro-cyclically. Returning to a balanced budget in later years, as intended, requires coherent measures on the expenditure side, linking fiscal consolidation with structural reform.

Economic growth is likely to remain weak in the first half of 2003, but to rise thereafter, reaching 3 per cent in 2004 as the international economy recovers and business investment picks up. Inflation is likely to fall to 1¼ per cent in 2004, reflecting significantly lower increases in unit labour costs and favourable import price developments.

Wage increases should be limited to levels provided for in the accord for 2003-04 so as to maintain international price competitiveness. The government should not allow the budget to fall into deficit so as not to erode the credibility of its debt-reduction strategy; this strategy entails running budget surpluses until 2030 so as to pre-fund the budget costs of population ageing, which will begin to build as from 2010.

Output growth is projected to strengthen progressively from 2 per cent in 2002 to 3½ per cent by 2004, driven by strong consumption and exports, especially those of foreign-investment firms. Massive currency appreciation has engendered a very sharp disinflation and price increases are expected to remain subdued.

Fiscal policy has become increasingly expansionary and needs to be tightened from the expenditure side in order to balance the macroeconomic policy mix. A determined pursuit of corporate governance and labour market reforms is needed to facilitate the re-employment of workers whose jobs are being made redundant by industrial restructuring.

The pace of activity has slowed in the face of weak exports, although domestic demand remains firm. Growth prospects are expected to brighten as the international situation improves and firms regain sufficient confidence to increase investment and hiring. Unemployment has drifted upwards but is still lower than its structural rate. Labour shortages could re-emerge as the expansion quickens, accompanied by accelerating wages.

With accommodating monetary conditions, the tax cuts planned for 2004 need to be accompanied by concrete measures to trim expenditure growth to avoid adding unhelpful stimulus to an economy already operating close to capacity. Further initiatives to get more people into work and reduce reliance on public benefits would help to ease these pressures.

A recent deterioration in the international outlook suggests that last years' recovery may be stalled until the second half of 2003. Once world trade picks up, the rise in exports should lead both to a revival in investment and a closing of the output gap, although unemployment will remain above the euro area average.

The surge in government consumption, if sustained, is likely to endanger the previous government's fiscal targets, which are appropriate in the light of imminent budget pressures from an ageing population. It will also severely constrain any scope for much-needed cuts in the tax burden on labour, which are needed to address high structural unemployment.

Real GDP continued to grow strongly year-on-year in 2002, but slowed in the second half when both domestic and external demand weakened. Output growth is set to pick up again during 2003, driven by a recovery in foreign demand and strong investment growth. Inflation, though easing, is expected to remain above the euro area average, partly reflecting differences in cyclical positions. The current account deficit, which edged up to 6½ per cent of GDP in 2002, is projected to narrow gradually.

The necessary rapid reduction of the high debt-to-GDP ratio requires tighter control of primary government expenditure and greater efficiency in public sector administration. Recent steps to reform the social security and tax systems are welcome. Further structural reforms in the labour and product markets, including a more determined opening of network industries to competition, are essential for sustained non-inflationary growth.

Activity remained strong through 2002 in spite of the international slowdown, because of an exceptional electoral fiscal stimulus. A transition from fiscal to export-led growth will begin in 2003 but, because of important competitiveness losses and the delayed international recovery, GDP growth will ease somewhat before picking up in 2004.

The policy mix needs to be rebalanced. A credible medium-term public expenditure framework should be introduced to help consolidation. Monetary easing is welcome but should depend on the ability of the social partners to moderate wage growth consistent with inflation targets.

With major imbalances having been corrected, recovery is likely to gather pace around the middle of the year when large-scale investments in power-intensive industries will begin to boost demand and push growth above potential rates.

Tighter monetary conditions will be required once growth picks up and a positive output gap re-emerges in order to prevent overheating in the middle of the decade. Fiscal policy will need to support this effort by moving toward a restrictive stance. In particular, it will be important to avoid an overlap of public infrastructure investments with the gearing-up of the power-intensive projects.

After unexpected resilience in 2002, real GDP growth is forecast to slow to 3¼ per cent in 2003, before rebounding to 4¼ per cent in 2004 with the strengthening of export market growth. Wage pressure is expected to weaken throughout the forecast period. While inflation is also forecast to fall, it is likely to remain above the European Union average, reflecting persistent price pressures in the service sector.

Now that private sector wages have begun to adjust to slower growth, the planned increase in public sector pay should be strictly conditional upon demonstrated higher efficiency in that sector. The projected public finance position looks healthy, but its realisation will require significant efforts to tighten control over expenditures.

Domestic demand decelerated at the end of 2002 in a context of geopolitical uncertainty that may continue well into 2003. Nevertheless, with a recovery in world demand expected in the second half of 2003, output growth may return to around 6 per cent in 2004. The unemployment rate is likely to remain near 3 per cent, while core inflation may rise to the top of the 2.5 to 3.5 per cent target range.

A gradual increase in interest rates may be necessary to keep inflation within its target zone, as the pace of growth picks up. Moving ahead with the privatisation of state-owned banks is important to cover part of the cost of financial-sector restructuring, while helping to promote corporate restructuring. Given this cost, as well as future spending pressures, the emphasis on fiscal consolidation has been appropriate.

With the lead sector of the economy, financial services, still in difficulty, GDP is expected to stagnate in 2003, under-performing the European Union for the third year in a row. More recently, conditions in domestically oriented sectors have also deteriorated. As a consequence, overall activity will not turn around before mid-2003, when the economy should benefit from a recovery of international financial services markets.

Government expenditures should be brought in line with lower trend GDP growth (3 to 4 per cent) as soon as possible to avoid a sustained deterioration in the budget balance, which would disrupt confidence.

The economy is experiencing a weak recovery, based on higher exports of manufactures to the United States. GDP growth is expected to gather pace as confidence improves and firms increase investment. The passthrough from currency depreciation will be moderated by tight policies and inflation is expected to fall. The current account deficit, which narrowed to a record low in 2002, is expected to widen gradually as activity gains momentum.

Economic policies were tightened in 2002 and early 2003 in the context of a weaker peso and stalling disinflation. This stance needs to be maintained to keep disinflation and fiscal consolidation on target and retain market confidence. Implementation of the reform of the electricity industry and the tax system would boost investor confidence and growth prospects.

Economic activity has weakened, but should begin to strengthen from the second half of 2003 as the international economy recovers, de-stocking slows and business investment begins to pick up. Real GDP growth may reach 2 per cent in 2004, which would nonetheless leave a substantial negative output gap. Given the sub-par growth outlook, employment growth is set to remain weak, increasing the unemployment rate to 5 per cent in 2004. With lower domestic cost pressures, inflation is projected to fall to 1½ per cent in 2004.

Improving competitiveness and enhancing employment prospects will depend on the resumption of wage moderation. It is important to remove the incentives to leave the labour force prematurely via benefit programmes. The government should take measures to adjust public spending to lower trend growth and return the budget to balance. The objective of paying-off debt by 2030, thereby prefunding the additional budget costs associated with population ageing, should be restored.

Activity is expected to slow in 2003 after four years of healthy growth. Continued strength in domestic demand will not suffice to offset the damping effects of weaker terms of trade and a sharply higher currency. However, the slowdown is likely to be short-lived, with growth returning to its medium-term potential rate of 3 per cent in 2004.

The currency appreciation has taken the pressure off monetary policy, as it should drive inflation down to the middle of the 1 to 3 per cent target range. Hence, interest rates can be left unchanged for the time being. The budget remains in surplus, and the government is prudently not raising expenditure in response to higher-than-expected revenues until it is confident that the fiscal surprise will prove permanent.

Growth, which was already subdued since 1998, slowed further in 2002 as wages and the exchange rate soared, squeezing mainland industry. Activity will remain subdued this year, but should pick up in 2004 as monetary policy easing feeds through and the global economy recovers. The unemployment rate is expected to peak at 4½ per cent, with inflation remaining low.

The authorities should not ease fiscal policy beyond the room for manoeuvre provided by the fiscal guidelines since easing would lead to further crowding-out of exposed industries. Wage moderation is needed to contain cost pressures, and work disincentives stemming from the disability and early retirement schemes should be reduced to stimulate labour supply.

Output growth has averaged just over 1 per cent during the last two years, with the unemployment rate rising to over 20 per cent. Helped by the strong export competitiveness, gradually increasing business profits and growing confidence as Poland moves closer to European Union membership, growth is likely to strengthen, reaching 3½ per cent in 2004. Headline inflation is also expected to pick up somewhat in the short-term, reflecting the effective depreciation of the currency.

Substantial cuts in nominal interest rates and a depreciation of the zloty have eased monetary conditions. Further monetary easing is desirable given the slow pace of the recovery relative to potential and still high real interest rates. But this needs to be supported by a strong effort to bring government spending under control. To maintain a favourable business climate and the attractiveness of Poland to foreign investors, structural reforms in labour and product market should be pursued in earnest.

Activity contracted in the second half of 2002, reflecting falling domestic demand and exports. Although lagging that of the euro area, a gradual recovery is projected in 2003 mainly driven by external demand. While narrowing slightly, the output gap is projected to remain large in 2004. Against this background, the inflation differential vis-à-vis the euro area is expected to narrow significantly.

Despite recent progress, the need for fiscal consolidation remains the main priority facing the authorities. Forceful implementation of recent structural measures will be required to rein in public spending.

Output growth seems likely to decelerate somewhat this year from the 4½ per cent growth of 2002 as the fiscal impulse is withdrawn while effects of price liberalisation and structural reforms initially damp demand. Inflation had decelerated to 3 per cent due to transitory factors and is picking up again temporarily as a consequence of energy prices increasing toward cost-recovery levels. The high current account deficit is expected to narrow as exports from foreign-controlled firms come on stream.

The scheduled tightening of fiscal policy is welcome, as an excessive loosening occurred last year. This should allow the central bank to soften the exchange-rate impact of strong capital inflows, helping domestic industry to maintain cost competitiveness. The determined pursuit of the ambitious structural reform programme is commendable and should lift productive potential towards levels already achieved by other accession countries in the region.

Growth slowed to 2 per cent in 2002, due to weaker private consumption and investment and sluggish foreign demand, but growth has remained higher than the euro area average. Inflation has declined rather little and the differential with the euro area persists. Activity should strengthen from the second half of this year, halting the rise in unemployment, with GDP likely to grow above potential in 2004.

In early 2003 a personal income tax cut was implemented, while the new Fiscal Stability Law entered into force, which obliges all levels of administration to aim at a balanced budget. The fiscal stance is, nevertheless, broadly neutral, which seems appropriate in view of the relatively small negative output gap. The inflation differential should be tackled by structural reforms rather than by tightening fiscal policy, most importantly by changes to the wage bargaining system to reduce nominal wage rigidities and by further enhancing competition in certain sectors.

The economy lost steam in the second half of 2002 due to weak export performance and falling business investment. A recovery in exports should make for stronger growth over the course of 2003, and prospects look bright for next year as the international situation improves and investment picks up. Developments in the telecommunications sector remain a source of downside risk, whereas rising wage pressures may imply an upside risk to inflation.

The fiscal position is still sound, with structural surpluses of around 1¼ per cent of GDP. However, following the large tax cuts in 2002, further fiscal stimulus would not be helpful. The proposed measures to curb the number of sickness beneficiaries should be implemented without delay. Monetary policy should be tightened gradually from the second half of 2003 as activity quickens.

The weakness of the external environment, especially in Europe, and the strength of the Swiss franc have continued to put a hold on activity, which stagnated in 2002. The pick-up in production linked to the international recovery should be close to ½ per cent in 2003, before accelerating to nearly 2 per cent in 2004, putting an end to the rise in unemployment. Lower inflation could result in virtual price stability.

The Swiss National Bank should maintain its expansionary monetary policy until the upturn is firmly established. A further cyclical deterioration in the federal budget in 2003 would be acceptable, but adopting an expansionary programme that erodes the structural deficit of the Confederation would not be desirable. More determined efforts to encourage competition would help increase growth potential.

Following the deep recession in 2001, the economy expanded by almost 8 per cent in 2002, with the end-year inflation rate falling to just under 30 per cent, well below the target of 35 per cent. Slower growth is projected in 2003, mainly because of the continuing reluctance of domestic banks to lend, higher real interest rates, and the war in Iraq. Inflation is projected to pick up in the first half of 2003, reflecting recent currency depreciation, the lagged effects of high oil prices and a seasonal hike in agricultural prices, before falling towards, though probably not reaching, the 20 per cent target by end-year.

The establishment of a single party government with a sizeable majority after the November 2002 general elections was initially welcomed by the financial markets. Nonetheless, a significant fiscal slippage has raised concerns. Adherence to expenditure targets and steady implementation of the structural reforms in the banking sector and elsewhere remain the key to maintaining the declining trend in inflation and creating the conditions for a durable recovery.

Economic activity continued to recover in the non-member Asian region throughout most of 2002, led by double-digit growth in exports. The expansion gained further momentum during the second half in China, but decelerated in Dynamic Asia in response to the renewed weakness in the United States and other OECD countries. Growth in Dynamic Asia should rebound in 2003 if OECD markets recover, but is subject to significant risks from geopolitical tensions, along with structural problems and the potential fallout from the outbreak of disease in several economies. China is less exposed to external risks, but further progress on structural reforms to achieve more balanced growth in the domestic economy are likely to be needed to sustain rapid growth in real GDP beyond the near-term.

Economic growth in Russia and other Newly Independent and South-East European States slowed to below 5 per cent in 2002. In a weak global environment, growth was mainly driven by strongly expanding internal demand, boosted in many countries by sizeable increases in wages and social benefits. Growth is expected to remain robust in 2003 at around 4 to 5 per cent, both for Russia and the region, but may slow further in 2004. In some countries, including Russia, higher growth in commodities and basic manufactures, compared to more complex manufactured goods, may increase the future vulnerability of these economies to external shocks.

South-America is slowly recovering from the regional recession of 2002. The new administration in Brazil has reassured markets in pursuing prudent macroeconomic policies and promising to undertake further structural reforms. In Argentina, the real economy is showing signs of recovery, despite the political impasse. Other countries in the region display mixed performances, with growth picking up in Chile whereas Venezuela is facing a severe recession. In addition to the restoration of confidence in the region, a demand push from abroad, notably from OECD countries, would be important to strengthen the incipient economic recovery.