Fri, Apr 06, 2012 - Page 12 News List

Citibank and DBS raise inflation forecasts

SILVER LINING:DBS said retailers are unlikely to pass higher cost burdens on to consumers to avoid dampening demand, limiting the negative impact on GDP

By Crystal Hsu  /  Staff reporter

Two foreign financial institutions yesterday raised their forecasts for Taiwan’s inflation readings this year, while leaving GDP growth estimates unchanged, as sharp oil price increases may neutralize the benefits of an improving global economy and closer cross-strait trade ties.

Citibank and DBS elevated their predictions for the nation’s consumer price index to 1.7 percent and 1.4 percent this year, from 1.4 percent and 1 percent respectively a quarter earlier, after the government raised domestic fuel prices by an average of 10 percent on Monday.

Net imports of crude and refined petroleum, which accounted for approximately 8.4 percent of GDP in the past five years, are projected by the government to lower GDP growth, forecast at 3.85 percent this year, by 0.22 percentage points, while adding 0.37 percentage points to the consumer price index, estimated at 1.47 percent.

“The improving global outlook will provide some upside risks for exports, which may stage a mild recovery this year after contracting 4.5 percent in the first two months,” Citibank’s Taipei-based economist Cheng Cheng-mount (鄭貞茂) told a media briefing.

The US banking giant revised up its global GDP growth forecast to 2.5 percent this year, with increases of between 0.1 percent and 0.3 percent in developed markets, including the US, the eurozone and Japan, Cheng said.

However, Citi adopted a guarded view on Taiwan, holding its GDP growth forecast steady at 3.7 percent because of weakening exports to its largest trading partner, China, and growing inflationary and taxation pressures ahead, Cheng said.

The Ministry of Economic Affairs is mulling electricity price increases, while the Ministry of Finance is studying levying a capital gains tax on securities and real-estate investments.

“We stand by the prediction that the economy probably bottomed out in the first quarter and will show improvement from the second quarter, although we are less sure about the pace of the pickup,” Cheng said.

Private investment is likely to become stronger on the back of a steady recovery in the global economy, while private consumption is displaying signs of a slowdown, based on the latest retail and dining revenue figures, Cheng said.

Expectations of higher utility costs and more taxes bode ill for consumer spending going forward, he said, adding that international crude oil prices pose another major downside risk.

Citi expects crude oil to trade at an average of US$115 a barrel this year, but it raised its target price from US$120 to US$125 a barrel, he said.

DBS shared Citi’s concerns on downside risks linked to crude oil prices.

“Together with South Korea and Thailand, Taiwan is the most vulnerable to oil price shocks in Asia,” the Singaporean banking group said in a report released yesterday.

The fuel price increases will inevitably erode household income and depress real consumption growth given the slim chance of wage increases, DBS said, without tinkering with Taiwan’s economic showing, which it estimates will expand by 2.9 percent this year.

Retailers are unlikely to pass higher cost burdens onto consumers to avoid dampening demand, therefore limiting the negative impact on GDP, the report said.

Both foreign banking groups expect the central bank to keep the benchmark rediscount rate flat at 1.875 percent this year because the risk of inflationary pressures, while higher, remains benign.

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