We downgrade our 2010 forecast from 5.5%Y to 4.2%Y: The changes in the 2009 quarterly growth profile do not have a significant impact on our 2010 GDP growth number. However, the 1Q10 growth revision surprised us on the downside. GDP growth was upgraded to only 3.1%Y from 2.9%, helped by slower inventories contraction and upward revision of net exports, while households' consumption was revised slightly weaker. We expected the 1Q GDP revision to be more positive as the prior revision of the industrial production series was significant, from 5.8% to 9.5% for 1Q. We also take this opportunity to fully incorporate the summer months' weakness into our forecast. Affected by extreme heat, July was broadly weak, and high-frequency August data show continuing weakness, adding pessimism on 3Q growth. As a result, we downgrade our 2010 forecast from 5.5% to 4.2%Y.
We expect higher growth in 2011: Our forecast for 2011 now stands at 4.3%, compared to 3.5% previously. The revision is only partly caused by a base effect, as GDP will likely continue to recover from a lower base. More fundamentally, we feel more confident that the government is keen on increasing spending and social transfers prior to presidential elections in 2012, which makes us more optimistic on household consumption. We expect a delayed recovery in investment to contribute to GDP in a more pronounced way in 2011. Lastly, the forward curve (which we use as input) is now showing the 2011 average oil price at US$79/barrel, compared to our previous assumption of US$74.
Perennial optimist Morgan Stanley today revised their GDP forecasts for 2010 and 2011. The firm lowered numbers for 2010, but increased their 2011 GDP forecast to 4.3%, up from 3.5%. The reason given for the positive 2011 outlook was that increased government spending ahead of the 2012 elections would boost consumption. From Morgan Stanley: