Inventory accumulation drives economic growth in Q3.

Inventory accumulation drives economic growth in Q3. The GDP growth in Q3 accelerated to 9.8% y/y in comparison to 6.7% y/y for the previous quarter, the Statistical Office confirmed. In line with preliminary data, the piling up of inventories proved to be the main driving force behind the record performance of the economy. Gross fixed capital formation, which includes inventories, increased by 19.3% y/y in the period, picking up from just 1.4% y/y in Q2. At the same time, the investment in fixed capital, net of inventories, was up only by 6.7% y/y. In contrast, the contribution of the consumption was down as its growth slowed down to 5% y/y. This, however, reflected mixed developments with the private and public consumption. Whereas the growth of public consumption dropped considerably to 1.2% y/y for the period, the growth of the private consumption actually accelerated to 6.5% y/y. The buoyant household demand might be a lagged effect from the strong growth of the real wages since the beginning of the year as well as optimistic expectations for the future. In our opinion, however, this would not be interpreted by the NBS as a higher risk of demand pressures on the price level since the growth of the real wages actually moderated to 2.7% y/y in Q3 against 4% y/y in Q2. On the other hand, the expected positive contribution from the net exports did not materialize as the imports growth caught up with the exports at 22.9% y/y and 23.8% y/y respectively. The detailed breakdown of the GDP, in our opinion, shows rather that it would be too optimistic to expect the high growth rate to be maintained in 2007 as well, given that the inventories rather than the net exports account for the rapid economic expansion for the period.In contrast, the Statistical Office projected a 7.7% y/y growth for 2006 as a whole and forecast that it would remain high at 7.2% y/y in Q1 of next year.