GDP to jump 5.8% in 2011:RCBC

As the global economy continues to recover, GDP is still expected to rise to 6.2% in 2012.

According to RCBC, after the economy finally took a breather in the third quarter, growth re-accelerated in the final quarter of 2010 (a 3.9% q-o-q SAAR) and took fullyear GDP growth to an impressive 14.5% y-o-y. In the final quarter, the pickup was led by private consumption, cheered on by good employment prospects and rising wages. Investments also picked up. On the supply side, manufacturing recovered as pharmaceutical facilities were switched back on following scheduled shutdowns in the third quarter. Services also saw stronger momentum.

RCBC also said, growth is expected to hold up in the coming quarters, but the expansion will take place at a more sustainable speed. However, recent high-frequency numbers for retail sales, industrial production, and exports suggest the slowdown may not be as strong as initially thought. They have, therefore, for 2011 as a whole raised their growth forecast to 5.8% y-o-y from 5.2%. Relative to last year, the slowdown is mostly driven by the smaller contribution from net exports and a drawdown in inventories as the global restocking cycle has already come to an end. These factors are expected to reverse in 2012 with the recovery in global growth. This will also lift private domestic demand and raise GDP growth to an upwardly revised 6.2% in 2012.

However, inflation has been on the rise, initially due to higher costs of accommodation and politically engineered higher prices on cars. Inflation has more recently become more broadbased as capacity remains tight and has raised demand-led price pressures. This will prevail even as growth eases to a more sustainable pace. Higher energy costs will also add to inflation, including through its second-order impact. In light of this, RCBC have raised their inflation forecast.

RCBC believes, this also calls for further monetary policy tightening and they expect a re-centering of the exchange rate band at the upcoming policy meeting in April. Fiscal policy could also turn out tighter than budgeted, given the conservative budget assumptions underlying the 2011/12 budget.