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.

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.