Measures on fuel duties and increases in state-financed pension entitlements are presently under consideration but not taken into account in the projections. The economy is projected to revert to trend Growth is projected to gradually moderate to trend rates over the next two years, so that the current small positive output gap would increase only slightly. The main underlying force would be the deceleration in private consumption, which would be affected by higher oil prices and no longer boosted by the sizeable wealth effects witnessed in recent years in connection with the buoyancy of stock and housing markets. This would be consistent with survey evidence of weakening consumer confidence. Concomitantly, the household saving ratio would recover somewhat.
Capacity utilisation is high and fixed business investment is projected to pick up.
Public sector investment is set to rise more rapidly, in line with the July 2000 Spending Review, following a string of lean years. The external balance would exert a diminishing but still significant drag on growth over the projection period. Against this background, unemployment would not decline further from its current low level. Wage and price inflation are projected to rise a bit, but retail prices are unlikely to increase much faster than the target. Risks to this rather benign outlook go both ways.