Important developments today:
1. Spanish bonds fall on debt concerns, continued rise in unemployment rate
2. US consumers buoy economy.
| Developing-country borrowing costs have declined in early 2012 amid reduced risk aversion. Yields for developing countries are now 550 basis points, below even the levels of June/July 2011 prior to the uptick in financial market uncertainty. Slow growth in the second half of 2011 will cut into annual growth rates for 2012 – even if quarterly growth rates strengthen. Oil prices have risen of late due to geopolitical concerns and falling surplus capacity. Increases come despite subdued oil demand and increases in oil supply that have offset production losses in different parts of the world. | |
| Developing-country bond yields have declined since the start of the year as global risk aversion eased. Yields have fallen to 5.5% for the first time since November 2010 and emerging markets bond spreads have fallen to 341 basis points, down from 481 bps in October 2011. Borrowing costs for developing countries are now lower than they were in June/July 2011 when the latest bout of financial uncertainty began. Most recently, yields have ticked up somewhat in-line with increases in US treasury rates. Nevertheless, lower costs have contributed to a surge in developingcountry bond issuance in the first quarter of 2012, with borrowing now standing 14% above the levels observed last year. |  |
| Weak growth in the second half of 2011 means that annual growth for 2012 will be about 1 percentage point lower than otherwise. Annual growth rates are heavily influenced by growth in the latter part of the preceding year. Mathematically even if there is no growth quarter-to-quarter during a year, annual GDP growth will be positive if the end-year GDP of the previous year was higher than beginning year GDP of the previous year. Over the last decade, the contribution of the previous year to the following year’s growth rate (the carry-over) averaged 2.2 percentage points for developing countries. In 2012, however, it is expected to be only 1.5 percentage points because growth in the second half of 2011 was so weak. As a result, even if developing-country GDP grows at a 6 percent annualized pace in every quarter of 2012, annual GDP growth for the year would be only 5.3 percent. For high-income countries, lower than normal carry-over can be expected to cut about 0.4 percentage points from the 2012 growth rate. Annual growth in many countries will be affected this year by the decline in carry-over contributions, notably in Greece and Thailand where declining GDP at the end of 2011 will subtract strongly from growth in 2012. |  |
| Oil market spot prices continue to be higher than forward prices (backwardation) – signaling perceptions of a tight market. This has occurred despite a return to near pre-crisis levels of oil production in Libya, and increased production by OPEC member countries to compensate for short-term production disruptions in Syria, Yemen, Canada, Sudan, and substitution effects caused by Iranian sanctions. The additional supply by swings producers has reduced spare capacity to below it 10-year average of 3.9 mb/d. And it is this reduced spare capacity that is driving market perceptions, even though demand remains relatively weak. Recent pronouncements by Saudi Arabia that prices are too high and that supply is ample, as well as the possibility that strategic reserves may be released have contributed to some easing of prices this week – but it is unclear how durable this effect will be. |  |
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Important developments today:
1. Financial market volatility is at its lowest since 2007
2. US manufacturing activity remains resilient amid contraction in Eurozone
South Africa appears to be mired in a cycle of modest growth, high inequality and record unemployment. This, despite an exemplary record on macroeconomic management and deepening integration with the global economy.
Inflation remains nestled within the target range of 3-6 percent and fiscal and debt management outcomes have been impressive.
Remarkably, there is broad political consensus on the issue of macroeconomic stability, recent calls for a looser stance by the labor unions notwithstanding.
A sustained pattern of high, broad-based and inclusive growth is yet to emerge, however. Despite a pick-up in per capita GDP growth from negative rates to an average of 1.6 percent per year during 1994-2011, per capita GDP is currently only 10 percent higher than in 1980: a period over which other developing countries have seen much more meaningful increases in their income levels.
In 2009, an EU-based chemical manufacturer opened a plant inside one of FYR Macedonia’s recently-established special economic zones. The plant began production of catalysts, a type of emissions-control component used in automobiles. Two years later, this investment drove chemical products to the third-highest spot on Macedonia’s export list, lessening the country’s reliance on metals and textiles.
In Nicaragua, low labor costs and high security compared to its neighbors have led zonas francas to expand dramatically, attracting producers of electronic wires and medical devices and expanding the country’s exports beyond an already-strong apparel sector. Between 2006 and 2008, for example, ignition wiring sets for vehicles were the country’s fourth biggest export.
These two examples demonstrate a new trend in small economies. Increasingly, as global value chains grow in importance,
In 2009, an EU-based chemical manufacturer opened a plant inside one of FYR Macedonia’s recently-established special economic zones. The plant began production of catalysts, a type of emissions-control component used in automobiles. Two years later, this investment drove chemical products to the third-highest spot on Macedonia’s export list, lessening the country’s reliance on metals and textiles.
In Nicaragua, low labor costs and high security compared to its neighbors have led zonas francas to expand dramatically, attracting producers of electronic wires and medical devices and expanding the country’s exports beyond an already-strong apparel sector. Between 2006 and 2008, for example, ignition wiring sets for vehicles were the country’s fourth biggest export.
When I first came to Kenya, in August 1990, I was a backpacker on a shoestring budget. At midcourse between Cape-town and Cairo, I got accommodation at the New Kenya Lodge in River Road for US$ 2.50. After spending two nights there, I continued to Garissa and Liboi, heading to Somalia.
In 1994, I returned with my wife, and in downtown Nairobi, urban chaos and poverty struck her so much, that she was reluctant to come back 15 years later, when I was offered a job.
Today, I enjoy the full beauty of Kenya with my family, and we all agree—my wife included!—that this is one of the most beautiful countries in the world. If you created an index of "natural beauty per square-kilometer" Kenya would probably come up on top of the list. Starting from Nairobi, within a few hours of driving, you enjoy the most amazing nature: the Masai Mara, Mt Kilimanjaro, Mt Kenya, and Lake Victoria, are all within reach. Nairobi is surprisingly pleasant, with one of the best climates in the world: it is one of the few cities where you neither need air-conditioning nor heating—all year long (well, it will soon get “cold” in July but the fireplace will help).
The recent IMF recommendation for a second aid package to Greece—amounting to 28 billion Euros over the next four years—helped push through the biggest sovereign debt restructuring in history, after Greece got private investors to forgive more than 100 billion Euros in debt. The IMF decision, announced by Christine Lagarde late last week, also marks yet another chapter in the ongoing saga of the European sovereign debt crisis.
We launched South Asia’s first regional report, ‘More and Better Jobs in South Asia’ in a series of events in Dhaka early last week.
Through events including a seminar with youth at the University of Dhaka, a formal report launch the next day, a TV interview with the South Asia Chief Economist, Kalpana Kochchar, and an op-ed in the leading English language newspaper, the report helped generate discussion on core economic challenges facing Bangladesh, as job creation are highly correlated with the challenges of faster growth.
Bangladesh, along with other South Asian countries, has seen steady job growth and a substantial decrease in poverty over the past three decades. The country has added nearly 1.2 million new jobs every year over the last ten years, and this has been accompanied by increasing real wages and declining poverty amongst all categories of workers. This performance will have to be improved in the future, owing to Bangladesh's early progress in its demographic transition. With substantial reductions in infant and child mortality following a significant decline in fertility rates, Bangladesh's working age population is growing more rapidly than its young and old dependents. In turn, this can be attributed to Bangladesh’s success in nurturing the desire for smaller families, through its reproductive health program as well as its emphasis on girls’ education.
I’ve just concluded a discussion on addressing youth unemployment around the world with experts at the Global Youth Conference currently happening and wanted to hear your thought as well as share some of my own on South Asia. Indeed, South Asia has grown rapidly and has created more and mostly better jobs. The region created 800,000 new jobs per month in the last ten years boosting economic growth and reducing poverty. Arrive in any South Asian metropolis and you’re often hit by the richness of activity throughout its busy streets.
The region’s coming demographic transition of more young people entering the work force is expected to contribute nearly 40 percent of the growth in the world’s working age (15—64) population over the next several decades. However, youth in South Asia still face many challenges during their transition to adulthood including malnutrition, gender inequality and lack of access to quality education. More working age people with less children and elderly dependants to support will either become an asset for the region to continue growing or a curse depending on the enabling environment for the creation of productive jobs.
Last year, Kenya’s economy was behaving like a plane flying through a storm on one engine. After a lot of turbulence, especially when the shilling reached a record low against the dollar, the Central Bank intervened forcefully, and brought the plane back to stability.
But Kenya’s exchange rate woes are just the tip of the iceberg (see figure). Kenya’s big challenge is to reduce the gap between the import bill and exports revenues, what economists call the “current account deficit” (which remains large, even when services—such as tourism—are included). Last year, the deficit reached more than ten percent of GDP, approximately Ksh 400 billion (US$ 4.5 billion). This is larger than Greece’s.
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The European Central Bank provided some half a trillion euros in lending to European banks in a second tranche of its Long-Term Re-financing Operation(LTRO), which has so far proven effective in stabilizing financial markets. Nonetheless the structural challenges in European banking system still remain. The sharp deceleration in global trade has most likely halted, benefiting from the stabilization of the situation in Europe, restoration of previously disrupted supply chains in East Asia (due to Thai floods) and expansion in output elsewhere in the global economy. Inflationary pressures in developing countries have fallen in recent months, however higher oil prices, if sustained, may stoke inflationary pressures once again. | |
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European Central Bank lending operations provide support to European banks and sovereigns. The ECB dispensed a second €530 billion tranche of low-cost three year loans to some 800 European banks (versus 523 banks in the first tranche) this week. This brings total lending under the program to €1,019 billion. The LTRO has eased funding pressures for both banks and troubled Euro Area sovereigns. Banks have used the cheap loans to buy higher yielding sovereign debt in a “carry” trade that has contributed to a decline in government bond yields, increased bank profitability and contributed to a 32 basis point decline in the Euribor-Eonia spread since mid-December – a sign that fears of banking-sector counter-party risk are declining. Despite support from the LTRO, Euro-Area bank-lending remains weak as banks continue to build up capital adequacy ratios and mark-to-market sovereign bond holdings as required by recent regulatory changes. |
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| The deceleration in global trade volumes has most likely bottomed out. Global trade volume growth decelerated sharply in the second half of 2011, in response to falling import demand in Europe and Thai flood-related supply chain disruptions in East Asia. Although global import volumes continued to decline at a 10.8 percent annualized pace during the three month ending December. Recent data suggests that the contraction may be coming to an end. Most of the quarterly decline reflected weakness in October. Global imports were actually rising at a modest 0.5 percent annualized pace in the final two months of the year. Trade growth is expected to continue to strengthen as the situation in Europe stabilizes, supply chains in East Asia are restored, and output continues to expand in both non-European high-income and developing worlds. Indeed, the January JP Morgan Global Manufacturing PMI index shows new orders rising for the first time since August.
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Inflationary pressures ease though risks remain. Lower and relatively stable food and fuel prices through much of 2011, policy tightening in some large developing countries, and a slower global economy have led to an easing of inflationary pressures in both high-income and developing countries since H2 2011. Continued soft (albeit strengthening) global growth should keep inflation at bay. However, the recent rise in oil prices due to ongoing geo-political tensions in the Strait of Hormuz, could, if sustained, stoke inflationary pressures once again. |
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In my previous blog entry, I mentioned the expected growing engagement between Brazil and Sub-Saharan African countries in 2012, to exchange knowledge and further economic and social development.
Stevan Lee, Senior World Bank Economist, is co-author of this post.
Attracted by the prospects of large unexploited natural gas reserves in the south of Tanzania, big players are in town. The British Gas Group has publicly announced that it may invest over US$35 billion in the next 25 years – 1.5 times Tanzania’s current GDP. Policymakers and donors are jockeying to position themselves and understand what is at stake.
The state of the global economy is now more troubled than what most pundits had predicted. The great recession of 2007-09 has left permanent scars and the global recovery has lost steam. In the industrialized world, the Eurozone is struggling to save its common currency and avert an even larger debt crisis. Across the Atlantic, although things are looking slightly better, the United States still faces damaged household balance sheets, depressed consumption, and persistent unemployment. In the developing world, the remarkable role that emerging markets have played as alternate engines of global growth is no longer certain. And this is truly worrisome because in the years that followed the recession, developing countries came to the global economy’s partial rescue, helping advanced economies from slipping into an even deeper recession.
In 2010 and 2011, developing countries grew 7.3 and 6 percent respectively, compared to the 3 and 1.6 percent growth of high-income countries, according to the World Bank’s latest Global Economic Prospects. Nevertheless, growth in several major developing countries like Brazil, China and India is significantly slower than earlier in the recovery, mainly reflecting a tightening of monetary policy to combat rising inflationary pressures but also the low-growth path in advanced economies. As a result, developing countries are now expected to grow only 5.4 percent this year.
