Growth is forecast to accelerate to four percent in 2006 and 4.4 percent in 2007, based on stronger private investment in the context of ongoing privatisation and enterprise restructuring and a continued strong merchandise export and tourism performance.
Based on the assumption of a continuation of stability-oriented monetary policies, the EC foresees moderate growth of private consumption of 3.7 percent in both 2005 and 2006, and of 3.9 percent in 2007 as further EU integration increases consumers' confidence.
Growth of fixed capital formation is expected to accelerate over the forecast period from 3.6 percent in 2005 to 5.3 percent in 2007, as a result of stronger private investment following further improvements in the overall business environment.
Real exports will continue to grow by around 6-7 percent annually, in particular backed by strong services exports. A rising stock of foreign direct investments will gradually improve the prospects for merchandise exports, reads the report.
Real imports are expected to expand more slowly than exports, but they will accelerate in line with growing GDP. Accordingly, net exports will contribute by almost around half a percentage point to GDP growth each year over the forecast period, the EC says.
Annual average consumer price inflation is expected to rise to three percent in 2005, largely as a result of higher oil and food prices. Further adjustments of administrative prices and indirect taxes will slightly accelerate inflation further in 2006 and 2007 to 3.1 percent and 3.2 percent respectively.
In line with accelerating GDP growth, employment growth is forecast to accelerate slightly from 0.9 percent in 2005 to 1.2 percent in 2007. This will lead to a gradual reduction of the unemployment rate from 13.3 percent in 2005 to 12.1 percent in 2007.
Real wage growth is expected to accelerate in 2006 and 2007, slightly above average productivity gains, leading to an increase in real unit labour costs, the EC says.
The general government deficit is expected to be reduced from 4.9 percent of GDP in 2004 to 4.5 percent in 2005. The forecast assumes a further reduction of the deficit to 3.7 percent in 2006 and 3.4 percent in 2007.
The share of current spending in GDP will be reduced, also as a result of some policy measures taken in 2005 (change in pension indexation, reduction of subsidies), and public investment growth will further slow down to more sustainable levels.
Revenues as a share of GDP, in particular indirect taxes, will only slightly decline.
The fiscal impact of the agreed repayment of old pensioners' claims starting in mid-2006 remains unclear and constitutes a potential downside risk to fiscal performance over the forecast period.
The general government debt-to-GDP ratio is expected to be reduced to 43.1 percent by 2007.
The trade deficit is expected to come down only slightly in 2006 and 2007, as import growth remains strong, reflecting a rather high import content of exports and a stronger private consumption growth in 2007.
As a result, the deficit as a percentage of GDP will only slightly decline from 24.3 percent in 2005 to 23.8 percent in 2006.
The current account deficit is forecast to increase to 6.2 percent of GDP in 2005 (from 5.3 percent in 2004), due to a deterioration of the terms of trade, a higher income balance deficit and statistical revisions.
The deficit will however be gradually reduced in 2006 and 2007 to 5.8 percent and 5.2 percent respectively, primarily on the back of a higher surplus of the services balance, reads the EC report.