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Both external and domestic demand components have been weak, reflecting developments in main trading partners, investment uncertainty, an unwillingness of households to further reduce their savings rate, and fiscal consolidation. While employment growth remained relatively strong in 2012, labour market conditions are now weakening. As a consequence, unemployment has gradually increased, but remains low. Inflation fell from its 2011 peak of 3.6 per cent to 2.6 per cent in 2012 and stood at 2.2 per cent in June 2013, with comparatively high price growth in the services sector. Wage increases in 2012 exceeded inflation only slightly, leading to modest real wage growth.
The current account is showing a modest surplus, which has fallen considerably from its pre-crisis level of almost 5 per cent of GDP in 2008 and amounted to 1.8 per cent of GDP in 2012, with a deficit in goods more than offset by a surplus in services. The real effective exchange rate has appreciated somewhat in 2012, reflecting the positive inflation differential with major trading partners.
Executive Board Assessment
Directors welcomed the overall results of the FSAP. Notwithstanding the overall system resilience to shocks, they recommended that large internationally active banks be encouraged to strengthen their capital buffers. Directors stressed the need to reinforce financial oversight and promote better risk management and governance practices, especially in the small- and medium-sized bank segment, to prevent a recurrence of past problems.