Economic growth has started to pick up on the back of stronger investment. Monthly inflation rates have been persistently above the mid-point of the inflation target, and inflationary pressures are likely to remain in place until the effects of tighter monetary policy are felt. Unemployment remains at record-low levels.

Growth is picking up and inflation remains low. Domestic demand has led the turnaround, aided by a small fiscal stimulus and rapid credit expansion that did not slacken until June 2013. By past standards though, the recovery is subdued, reflecting a marked slowing in potential growth in the past few years. The momentum of domestic demand is projected to help external rebalancing resume in 2014 but little change has occurred so far in the structure of domestic demand. Overall excess capacity is limited and shrinking. With a fairly neutral macroeconomic policy stance, growth is projected to peak in 2014 and then edge down to around 7.5% in 2015.

Economic activity is expected to recover gradually as the rupee depreciation supports exports, infrastructure projects cleared by the Cabinet Committee on Investment come on stream and political uncertainty declines after the general election due in the spring 2014. However, the rupee depreciation is putting pressures on inflation and the public finances, as well as on corporates and banks with high external debt exposure. Supply constraints will continue to restrain growth, adding to inflationary pressures and the current account deficit.

Both domestic and foreign demand have slowed. Inflation has risen, at least temporarily, as fuel subsidies have been cut. The current account has continued to deteriorate, due to weak trading-partner growth, declining terms of trade and structural impediments in a number of export sectors. The currency has depreciated sharply, with the rupiah at its lowest level since March 2009.

Growth is projected to gradually strengthen, driven by higher infrastructure spending and, as the euro area recovers, stronger output, exports and investment in the mining sector. Consumption growth will remain solid as low unemployment fuels real wage growth. Strengthening domestic demand will be associated with a further decline in the current account surplus relative to GDP. Inflation is now falling due to the good harvest, but as economic growth picks up the pace of underlying disinflation will slow.

The economy is projected to pick up as exports benefit from a weaker rand and strengthening world trade growth. Domestic demand is hampered by low confidence and slow income and employment growth, but should gradually pick up on the back of faster exports. Inflation is set to recede due to the substantial slack in the economy.