The expansion has lost some momentum, in part as a consequence of the energy price increases. These have already held back real disposable income gains and, with household savings near zero, are likely to weigh on consumption. Core inflation, which rose earlier in the year, has since fallen back towards the lower end of the desirable range. Productivity has decelerated towards trend growth, but profit margins remain high, supporting future investment. The economy is expected to keep growing above potential. However, further sustained increases in energy prices, weakness in the labour market, or a sharper than projected rise in long-term interest rates pose downside risks. Although some stimulus has been removed, monetary policy remains supportive. Future tightening can afford to be gradual, as higher energy prices are restraining activity more than boosting inflation expectations. Government finances have improved more than expected, but faster revenue growth has been partly offset by higher spending, especially on defence and homeland security. Projected deficits thus remain large, underlining the need to adjust tax and spending levels to rein in the debt accumulation and prepare for impending demographic pressures. This might also lessen the record external imbalance. ...