Over the first half of this year, the world economy has experienced difficult circumstances indeed.  With the continuing European sovereign debt crisis and the slowdown of mainland China’s economic growth, the International Monetary Fund (IMF) has downgraded the world GDP growth forecast to 3.5% this year, indicating that the external demand remains pessimistic.  Unfortunately, domestic demand remains weak resulting from the rise in oil and electricity prices and the uncertainty of tax on security capital gains.  Due to the domestic and external problems mentioned above, the real GDP growth last quarter remained weak with a rate of 0.39% YoY.  However, the leading indicators have presented an upward progress in recent months.  Therefore, we predict that the GDP growth will accelerate in the second half of this year.  We have downgraded our forecast for real GDP growth this year from 3.81% to 1.94%.

        Regarding private consumption, two critical events have thwarted consumer’s intentions for consumption in Q2.  One is that the rises in oil and electricity prices have inflated prices, and the other is that the issue of tax on security capital gains has exerted a negative influence on the stock market.  With these negative impacts, we forecast that the growth rate of real private consumption this year will be adjusted down from 2.72% to 2.10%.  In addition, regarding to private investment, weak external demand has weakened the investment intentions of domestic firms, especially for capital equipments.  However, since tourism and leisure industry have grown progressively in recent years, it is expected that the investment in this area will increase. Therefore, we forecast that the real private investment will slightly fall 0.50% this year. Moreover, because the investments by government and public enterprises have continually decreased since last year, we forecast that the real gross fixed capital formation will drop 2.13% this year.

        In terms of international trade, the ongoing European debt crisis continues to have a negative impact on global demand and world trade volumes.  Aside from the crisis, the slowdown of mainland China’s economy also negatively influences the momentum of international trade.  As the largest international trade market, both exports and imports with mainland China have dramatically plunged since last November.  As a result, we substantially downgrade the growth rates of real exports and imports of goods and services to 0.87% and -1.06%, respectively.

        In terms of the labor market, the unemployment rate has declined from 4.6% in Q1 last year to 4.2% in Q1 this year, indicating that the domestic job market has gradually improved.  However, with the influx of new graduates into the labor market in June and July, it is expected that the unemployment rate will increase slightly.  We thus forecast the average unemployment rate to be 4.18% this year.  Furthermore, due to weak external and domestic demands, the ‘unpaid leave’ scheme has impacted thousands of employees.  Thus, we expect that the average earnings of employees on payrolls this year will be 45,491 NTD, a 0.43% drop from last year.

        Regarding the price index, the consumer price index (CPI) has increased since this April resulting from rises in oil and electricity prices.  Although the decreasing of world crude oil and domestic communication prices offset parts of inflation, we expect that these prices will not distinctly decline in H2 this year.  Additionally, the second stage of the raise of electricity price will be implemented in Q4.  Therefore, we upgrade the annual growth rate of CPI this year from 1.16% to 1.80%.  However, the prices of exports and imports have presented a significantly negative growth in Q2, implying that wholesale price index (WPI) may not enhance severely.  We forecast that the annual growth rate of WPI is expected to be 0.67%.  Moreover, for the money supply, it is forecasted that the growth rate of money supply will be slow down with 4.28% of narrow money supply (M1B) and 5.01% of broad money supply (M2).

        As mentioned above, the revision in terms of international trade constitutes the main adjustment made to this forecast.  Because world outlook and global trade activities remain very weak and uncertain, this revision adjusts down the real growth rate of exports and imports by 4.28% and 3.26%, respectively.  In addition, fixed investment, nearly accounting for 20% of real GDP, is also affected by the recent deterioration in economic conditions.  Thus, the investment intentions of the public and private sectors dramatically decline.  Looking ahead, in the second half of this year, the outlooks of Eurozone members will continue to influence the progress of the global market.  Moreover, with the high degree of dependence on trade with mainland China, the concern remains whether the mainland China’s economy will lose its growth momentum in H2 2012.  As a result, incorporating with forecast error and uncertainties, the 50% of GDP interval forecast ranges from 1.24% to 2.92%.