However, underlying price pressures will likely remain high, making it difficult for inflation to fall below the 4% mark in the remaining months of this year.
DBS expects GDP growth to remain positive in 3Q11 as domestic demand has remained broadly stable despite the weakening export outlook.
Here’s more from DBS:
The inflation report for September is due to be released tomorrow. Headline CPI inflation is forecasted to slow to 4.3% YoY from the peak of 5.3% in August, but mainly attributed to a high comparison base. The underlying price pressures will likely remain high, and core CPI growth is projected to stay unchanged at 4.0% YoY. The sharp movement in the won/dollar rate (a won depreciation of 10% within one month) should more than offset the disinflation effects of declining global commodity prices.
Meanwhile, the central bank’s slow moves on the interest rate policy have failed to contain domestic inflation expectations (4.3% in Sep, up further from 4.2% in Aug) and prevent second-round inflation effects. It will be difficult for inflation numbers, both headline and core, to fall below the 4% mark in the remaining months of this year, unless a 2008-style financial meltdown/global downturn happens and hits the domestic economy badly.
In fact the economic data available thus far still support our view that growth is slowing rather than slipping into recession; and domestic final demand has remained broadly stable despite the weakening of export outlook. Industrial production dropped -1.9% MoM sa in August, but services output – driven by domestic demand to a larger extent – continued to grow a solid 0.5%. The leading composite index reported a still positive on-month growth of 0.2% in August. We continue to expect GDP growth to stay in the positive territory in 3Q (about 1-2% QoQ saar) before regaining momentum in 4Q.
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