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Continued stagnation raises concerns about growth model

Growth stagnated at 1.2% on the year in Q3, in a further sign that the economy’s growth model is in need of rejuvenation. The outcome was broadly in line with our expectations, and our forecast for real GDP growth in 2013 is revised down slightly at 1.2%.

Inflation has been stubbornly high recently, leading us to downgrade our estimate of the existing level of spare capacity in the economy. As a result, we expect counter-inflationary pressures to be weaker, with CPI inflation forecast to average 5.6% in 2014. Given this, and the recent hawkish tone of central bank communiqués, we now expect a less concerted monetary easing cycle. As a result, we have revised down our forecast for real GDP growth to 1.9% in 2014, from 2.8% in the previous edition.

In the medium term, the economy’s poor demographic profile and slow pace of reform will constrain real GDP growth to just over 3%. We think that the risks to our forecast are now broadly balanced, with a deep-rooted reform program capable of pushing trend growth beyond 4%.



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