Now, I would like to talk about developments in economic activity and the short-term outlook, on which the inflation forecasts are based. Economic activity was more favorable in the second quarter of 2013 compared to the outlook set in the July Inflation Report. The stronger-than-expected economic activity was mostly driven by changes in inventories. Private consumption demand saw a dramatic recovery, while final domestic demand remained almost flat due to slowing public demand (Chart 18). On the other hand, imports grew strongly, while exports increased only modestly due to weak global demand. Indicators for the third quarter of 2013 suggest that economic activity will grow more moderately than in the second quarter. In the July-August period, production of consumer goods was down from the previous quarter, while imports of consumer goods continued to rise. On the investment side, indicators show a weaker outlook compared to consumption demand. While exports were flat, imports saw a remarkable decline. Therefore, we expect the negative contribution of net exports to growth to decrease in the third quarter. Meanwhile, the export-weighted global growth index remains virtually unchanged from the previous reporting period (Chart 19). Final domestic demand is likely to continue to recover modestly in the second half of the year. Thus, we revised output gap forecasts slightly upwards for 2013. However, downside  BIS central bankers’ speeches  3  risks to recovery increased following the latest financial developments. Accordingly, we revised output gap forecasts downwards for 2014.
Moreover, the output gap forecast, which was revised upwards owing to the better-than-expected growth outlook for 2013 compared to the figures presented in the July Inflation Report, added 0.1 percentage points to the year-end inflation forecast. Developments in the exchange rate and oil prices were also influential on the revision in the inflation forecast for 2014. When evaluated together with output gap forecasts, we expect these cost-side factors to push the inflation rate in 2014 up by 0.3 percentage points. 4  BIS central bankers’ speeches  Although inflation is estimated to fluctuate in the short term due to the base effect on energy prices, we expect it to remain on a downward track. As the effects of the hike in tobacco prices in January 2013 on annual inflation taper off, we expect inflation to plunge in early 2014, and come down to levels consistent with the target by the last quarter of 2014. In addition to these forecasts, alternative scenarios on the inflation outlook and the global economy are discussed in the Risks section of the Inflation Report. You can examine the Report for details. While concluding my remarks, I would like to thank all my colleagues who contributed to the Report, primarily those at the Research and Monetary Policy Department as well as the members of the Monetary Policy Committee, and thank every one of you for your participation. Chart 1  Chart 2. Global Risk Appetite  Portfolio Flows to Emerging Economies (12-Week Moving Average, Billion USD)  Source: Bloomberg, Credit Suisse.