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.