Greece

Activity slowed in 2005 as the waning of the Olympics-related stimulus and, to a smaller extent, higher oil prices weighed upon domestic demand. The positive development differential with the euro area, however, remained substantial. GDP growing should continue at around 3 3/4 through cent over the next sum of two units years, helped by a react in investment activity. Although inflation is place to diminish to around 3% through 2007, it will continue to exce the euro area average--a tend that will at some point undermine competitiveness if it is not reversed

Wide-ranging reforms of the pension and health care combination of parts to form a wholes are needed to ensure the sustainability of the public finances. new measures to improve the operation of public enterprises are welcome. The rigorous implementation of the National Reform Programme, which stations as priorities restoring sound public finances, improving the business environment and boosting productivity and pursuit would create room for continued able-bodied growth.

Output development remains robust, and inflation is relatively high

Real GDP grew by the agency of 3.7% in 2005, after expanding by the agency of nearly 5% in the previous year. The slowing mainly mirrors a sharp decline in public investment spending in the post-Olympics period. Gros fixed capital formation blood-thirsty by around 1 1/2 through cent in 2005, after an annual average expansion of around 8% over the previous five years. Consumption development also weakened, but remained buoyant upon the back of still rapid credit expansion. trap exports have also added to output extension after several years of negative contribution, as import growing faltered following a surge in 2004 Higher oil prices, and to a smaller extent an increase in indirect taxes in April 2005 lifted harmonised consumer price inflation to 35% for the year as a whole. Core inflation, upon the other hand, benefited from subdu unit labour take away from growth and diminishing domestic demand crushings The core inflation differential vis-a-vis the euro area averaged approximately 2 percentage points in 2005 on the contrary the gap narrowed significantly in early 2006 Unemployment declined to around 10 1/2 for cent in 2005, but is still among the highest in international comparison. The general account deficit has widened, mainly as a spring of a burgeoning trade deficit (largely owed to a significantly higher oil bill), which has single been partially offset by a small increase in the services surplus.

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Fiscal consolidation is underway

The fiscal position improved significantly in 2005 with the general conduct deficit shrinking by 2 1/2 percentage points of GDP to 45% This reduction was achieved despite a considerable under-performance of tax incomes and was due mainly to a sizeable fall in public investment outlays after the Olympic Games, accompanied by dint of restraint in the growth of primary expenditure. The latest Stability Programme targets a deficit of 26% of GDP in 2006 being gradually reduc to below 2% by means of 2008. The deficit reduction in 2006 is helped by the agency of one-off measures worth 0.6% of GDP upon present policies, the OECD's projection is for a general management deficit of 3% of GDP in 2006 and 33% in 2007

Activity should remain robust, on the contrary there are both internal and external risks

Real output is throwed to grow by around 3 3/4 through cent over the next sum of two units years, thus outpacing the euro area average by the agency of a substantial margin. A bound back in investment activity from post-Olympic depresseds is expected to sustain domestic demand, compensating for a likely deceleration in consumption as a proceed of fiscal retrenchment. Low interest rates, and a number of investment-boosting initiatives, including a gradual lowering of corporate tax rates, a new law providing fiscal incentives for private investment casts and legislation covering public-private partnerships should support domestic activity above the projection period. Exports are station to increase in line with export markets, despite more [i]or[/i] less further deterioration in cost-competitiveness, on the contrary import growth should also pick up in line with strengthening domestic demand, turning the increase contribution of the foreign balance slightly negative. upon the domestic side two major uncertainties are whether inflation will ease to around 3% and whether the shoot forwarded improvement in the fiscal position will be realised. The main risks upon the external side include exhibitions in oil prices and the resilience of global growth