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Consumption grows at fastest pace since 1997
In the
first quarter, gross domestic product (GDP) added 4.3% over the same
quarter last year. The figure came in behind the previous quarter’s
reading of 4.8% (previously reported: +3.8% year-on-year) and was just in
line with market expectations. Strongly favourable results in domestic
demand helped propel the economy along. Investment booked strong growth,
adding 7.2% annually, however, this was below the 9.6% expansion observed
in the fourth quarter of 2006 (previously reported: +6.9% yoy).
Nonetheless, owing to the Central Bank’s consistent lowering of interest
rates, the primary driver of growth was total consumption, which
accelerated from 4.3% growth in the fourth quarter to 5.5%, marking the
fastest expansion in almost a decade. In contrast, the external side of
the economy also fared well, increasing its overall contribution to the
economy. As export growth sped up from 4.9% the previous quarter to
5.9%. Imports, in contrast, decelerated as growth declined from 22.6% to
20.0%. On a sectoral basis, slower growth in industry as well as
agriculture were responsible for the first quarter’s slowdown. Services,
in contrast, expanded 4.6% annually (Q4: +%3.8 yoy), the fastest rate
since 2004. A quarter-on-quarter comparison corroborates the deceleration
suggested by the annual figures. According to seasonally adjusted date,
economic activity grew 0.75% over the previous quarter. However, the
first quarter pace is down from the 1.10% expansion registered in the
fourth quarter.
Economic reforms show
progress
The first quarter 2007
showed strong economic growth, which had been bolstered primarily by
domestic demand. In an effort to promote consumption and economic growth,
the Central Bank has consistently cut interest rates, which are currently
at an all-time low. Since
September 2005,
the Bank has cut rates
from 19.75% to 12.00% in 16 steps. Apparently, these efforts are
beginning to pay off. However, despite the first quarter’s strong
expansion, the business confidence index (ICI) slid down from 118.2 in May
to 117.5 in June. Nonetheless, business confidence remains well above the
100-point threshold that marks the division between optimism and pessimism,
suggesting that investment will continue to grow in the coming months. On
the other hand, the consumer confidence index (ICC) continues to be
resilient, rising from 108.5 to 109.1 in June, which constitutes the
highest reading since February. Strong results in the ICC point to a
continued expansion in consumer spending in the next months. Furthermore,
in June, seasonally industrial production added 1.26% month-on-month,
which marks the largest single month gain since May 2006. Finally,
despite the appreciation of the currency, the external sector continues to
gain strength, with imports moderating and exports continuing to
accelerate.
Consensus Forecast participants anticipate the economy will grow 4.3% in
2007, which is up 0.1 percentage points from last month’s figure, but
below
the
Central Bank’s revised target of 4.7% annual growth which has been revised
up from a range of 4.1% to 4.5% earlier this year.
Next year, the pace of economic activity should
moderate slightly with growth reaching 4.2%, which is down 0.1 percentage
points from last month’s estimate.
Inflation picks up the pace
In June, consumer prices increased 0.28%, which was the same
as the rise registered in May, but came in slightly below market
expectations, which had prices adding 0.30%. The reading was broad-based
as six of the nine categories constituting the price index registered
price increases. Higher prices in food and beverages as well as clothing
pushed the monthly reading. Even though the price increase was moderate,
annual headline inflation jumped from 3.2% in May to 3.7%. However,
despite the sudden increase in inflation, the rate remains well below the
Central Bank’s target of 4.5% and within the Banks 2.5% tolerance margin
around the central target rate. Owing to the benign inflationary
environment, the Central Bank decided to keep its benchmark interest rate
unchanged at 12.0% at its 6 June policy meeting. Despite nominal interest
rates being at a historical low, they are still among the highest real
interest rates in the world, given the rapid decline in inflation. Real
interest rates may decline, however, if inflation accelerates again as
expected by the market. Consensus Forecast participants expect inflation
to close the year at 3.5%, which is up 0.1 percentage points from last
month’s forecast. For next year, Consensus Forecast participants expect
consumer prices to accelerate slightly to 3.8% |
