Real GDP is contracting, largely reflecting a specialisation in export-dependent manufacturing. Falling investment and recession in major export markets are contributing to a sharp downturn this year, followed by a weak recovery in 2010, driven by the gradual pick-up of private consumption and export demand.

Growth slowed in the first half of 2008 and is not expected to return to trend again until 2010. The slowdown started with weaker domestic demand in 2008, as the inflation spike eroded consumers’ purchasing power, and will continue as export market growth slows. The rebound is projected to be driven by both private consumption and exports. Inflation is expected to decelerate substantially in 2009 as the impact of one-off government measures wears off and global energy and commodity prices fall.

A policy-driven spike in inflation in the first half of 2008 is going to temporarily dent otherwise healthy economic conditions, and real GDP growth will dip below potential as the increases in indirect taxation and administered prices squeeze consumption. Underlying inflation is low, but is creeping up and further tightening of monetary conditions is expected.