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Global Economic Prospects January 2012

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Prospects Weekly: The up-tick in market tensions have caused CDS rates to rise sharply

Submitted by Global Macroeconomics Team on Fri, 2012-05-25 14:50
The up-tick in market  tensions following recent bank downgrades, partial nationalizations and elections have caused CDS rates to rise sharply, although in most countries they remain below their fall 2011 highs. Stock markets have also tumbled, exchange rates depreciated and the turmoil has contributed to falling commodity prices. The real side effects of the recent bout of market nervousness remains uncertain, however based on the relative size of the financial turmoil, its impact could be half as severe as the GDP growth deceleration (relative to earlier forecasts) observed in the fall of 2011.
 
Contagion from renewed tensions in the Euro Area appears less extensive than in the fall of 2011. Recent bank downgrades, partial nationalizations and elections have caused developing and high-income country stock markets to lose about 12 percent of their value since May 1st, giving up almost all of the gains generated over the preceding 4½ months. Yields on high-spread economies have risen, while those of safe-haven assets have declined. Virtually all developing economy currencies have lost between 3 and 7 percent against the U.S. dollar. Credit default swaps (CDS) rates have also increased significantly. Nevertheless, CDS rates in non-European high-income and developing economies remain well below their July 2011 levels. Emerging market bond spreads, although up are still 149 basis points lower than in October. 
Real side effects of the recent increase in market nervousness remain uncertain. It is too soon to observe the impact of the renewed financial-market turmoil on the real-side of the economy, but it is likely to be negative — particularly in high-income Europe. How negative is of course unknown. To-date, Euro Area financial market indicators have deteriorated about half as much as they did in the fall of 2011 (relative to July 2011), which suggests that the hit on activity could be about half as severe as in the fall of 2011 — when Euro Area quarterly growth rates declined by about 0.5 percentage points relative to expectations in June 2011 and whole year growth was off about 0.2 percent. 

The recent increase in market nervousness has driven commodity prices downward. Since the beginning of May, crude oil prices have fallen 15.8%, influenced primarily by concern that financial turmoil will cut into global growth and oil demand (improving supply conditions and easing tensions with Iran helped as well). Recent events also contributed to falls in copper and aluminum prices of 11.2% and 5.4% respectively. Many agricultural commodity prices have declined as well (corn, cotton and rubber), which should help relieve inflationary trends in developing countries. Developing countries are not expected to suffer large impacts if financial tensions do not worsen, and lower commodity prices will buffer those impacts for importers. However, for commodity exporters, lower commodity prices will reduce government revenues, weaken current account positions, and if long-lasting, will cut into growth.

 

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Prospects Weekly: Market confidence has been rattled once again

Submitted by Global Macroeconomics Team on Mon, 2012-05-14 09:52

Market confidence has been rattled once again following recent election results in France and Greece. However, credit default swaps rates, while up, remain well below their fall 2011 highs. Through March, retails sales have continued strengthening among both developing and high-income economies, although weakness still persists in the Euro Area. Notwithstanding the post-crisis appreciation in the currencies of several developing countries, in general, their currencies still remain below pre-crisis peaks.

 
Euro Area sovereign debt concerns have resurfaced once again. Following elections in France and Greece, the political landscape in the Euro Area has changed. The new French President-elect has indicated his intention to add a growth component to the EU fiscal treaty, while the Greek elections were inconclusive, and the influence of anti-austerity parties has increased markedly. These events, plus the announced bail out of one of Spain’s largest banks have rattled investors’ confidence once again. Credit default swap rates (CDS) have risen by 95.3, 37.3, 25.8 and 19.4 basis points in Portugal, Spain, Italy and France, respectively between 4th and 9th May. Among other Euro Area countries, CDS rates are up an average 5.2 basis points, but remain 116.5 basis points below their fall 2011 peaks.

Retail sales continue to strengthen across most regions. Easing inflationary pressures, rising employment strong credit growth, and in some cases lower policy rates have contributed to an up-tick in developing country retail sales volumes during the three months ending February (10.7%, 3m/m saar). The strength of developing-country domestic demand is also reflected in their import demand, which increased at a 19 percent annualized pace over the same period. In the U.S., improving labor market and consumer confidence conditions have boosted retail sales growth. Even in Europe, where consumer confidence remains low, retail sales expanded in March - the first increase in 5 months. Nevertheless, demand remains shackled by high unemployment and ongoing fiscal austerity. Looking forward, recent easing in oil prices could support real-incomes and further boost retail sales.

 
Despite substantial appreciations since the trough of the crisis, the real-effective exchange rates of many developing countries remain below pre-crisis peaks. Measured from post-crisis troughs the currencies of many developing countries have appreciated strongly (by more than 30 percent in many cases). However, measured on a longer-term perspective, the real-effective exchange rates of currencies of Indonesia, Brazil, Russia, India and Turkey remain below pre-crisis peaks. Among major middle-income countries, China’s Renminbi has appreciated the most. While capital flows have contributed to short-term volatility, the appreciation since 2005 among commodity exporters like Brazil, Indonesia, and Russia appears to mainly reflect higher commodity prices.

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Prospects Weekly: Headwinds from Euro Area likely to persist through the second quarter of 2012

Submitted by Global Macroeconomics Team on Fri, 2012-04-27 10:41

Latest business surveys for the Euro Area suggest that the nascent recovery in activity in the region may be shortlived. Recent data suggests that Euro-Area deleveraging has had a negative impact on trade finance, but that trade finance availability should firm during 2012. Developing countries have made substantial progress toward reducing global poverty, but progress reducing child and maternal mortality rates (two factors closely linked to nutrition) has lagged.
 
Headwinds from Euro Area likely to persist through the second quarter of 2012. After Euro Area industrial production accelerated through February 2012, recent business surveys have taken a turn for the worse, suggesting that the recovery in activity may be short lived. Markit’s Purchasing Manager’s Index for both manufacturing and services in the Euro Area dipped deeper into contractionary territory in April. Although not conclusive, the decline suggests that the ongoing banking sector deleveraging, fiscal consolidation, rising unemployment, high-oil prices, and recent renewed concerns on Euro Area sovereign debts will continue to weigh on real sector activity in Q2. Continued European weakness bodes ill for developing country exporters.

 
Trade finance for firms in developing countries appears set to firm after recent weakness. European banking-sector deleveraging cut into trade finance flows as measured by Dealogic in the second half of 2011. Europe (includes both high-income and developing European economies) had been hardest hit, with Q1 2012 flows well below the levels observed even in Q4 2011, when European trade activity was falling at a 29.5 percent annualized pace. In developing regions the story is more mixed. In East Asia and Latin America the data shows some pick up perhaps reflecting entry of regional banks into the trade finance arena. In the Middle East the dissipation of some of the turmoil associated with political change in North Africa has supported flows. Trade finance flows to Africa are also up slightly. However, in South Asia, which witnessed a sharper Q4 2012 trade contraction, flows remain down. A recent ICC-IMF survey observed that the majority of respondents expected an improvement in the outlook for trade finance in 2012.

 
Developing countries make progress towards the Millenium Development Goals (MDGs). Two of the MDGs (benchmark development objectives for the year 2015 set by the UN in 2000) have been met, with a halving of global poverty rates and of the proportion of people without access to safe drinking water. However, MDGs closely linked to food and nutrition are lagging. One conservative estimate suggests that over 200 million children under five years of age in developing countries fail to reach their cognitive development potential because of risks of poor nutrition and poor health. Despite its critical role, only about 0.3% of aid flows are oriented toward nutrition. In recent years, progress has been further complicated by high food prices, which affect diet quality, real-incomes and access to quality of care for infants and young children.

 

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Prospects Weekly: Investors have returned to emerging markets equity and fixed-income mutual funds

Submitted by Global Macroeconomics Team on Mon, 2012-04-09 16:32













Investors have jumped back into emerging-market equity and bond mutual funds, bringing quarterly inflows up to about $40 billion—well above the 7-year average. Unemployment rates are retreating in most countries, but continue to rise from an already elevated level in high-spread Euro Area countries. Increased grain planting area announced in the U.S. suggest that, if normal weather conditions prevail, grain markets are likely to be wellsupplied. However, increased plantings were achieved at the expense of soybeans—which could bring price pressures to edible oil markets.
 
Investors have returned to emerging markets (EM) equity and fixed-income mutual funds in the first quarter of 2012, although the pace of inflows has decelerated recently. Emerging market bond funds received total inflows of $14.4 billion in inflows during the first quarter, while equity funds posted inflows of $25.6 billion. This follows a very weak second half of 2011 when investors redeemed positions equal to some $9.6 and $17.6 billion in the third and fourth quarters respectively. Despite recent declines, monthly inflows during March exceeded 7-year averages by 10.8 percent for equities and are almost 4 times higher for bonds.
Unemployment rates continue to rise in high-spread high-income European countries, while in developing and other high-income countries they are declining. So far this year the aggregate unemployment rate in high-spread high-income European countries has risen by 1.1 percentage points and now exceeds 15 percent. This contrasts with Germany where the unemployment rate continues to fall and is now well below pre-crisis levels. Elsewhere in Europe unemployment rates are also declining, but only gradually and unemployment remains well above pre-crisis levels. Unemployment is also declining among high-income countries outside Europe, notably in the United States, although there too the unemployment rate is still almost 3.5 percentage points above its pre-crisis average. Among the 27 developing countries reporting data, unemployment inched down to 7.2 percent of the labor force as of February 2012—regaining its pre-2008-crisis level, and significantly below its 20-year average of 8.8 percent.
Global wheat and maize prices remain relatively low, despite lower than expected stocks. Maize and wheat prices are at broadly the same level as two weeks ago, despite sharp fluctuations in the run-up to and following recent U.S. Department of Agriculture (USDA) reports on planting intentions and grain stocks. The reports indicated that U.S. maize and wheat stocks on March 1st were 8 and 16 percent lower than a year ago, well below expectations and earlier estimates. As a result, futures prices jumped 6.6 and 7.9 percent on March 30th regaining the losses incurred earlier in the week in anticipation of a more upbeat outlook. The USDA also reported that US maize and wheat plantings are expected to rise 4 and 3 percent in 2012. As a result, if normal weather conditions prevail, grain markets will likely be well-supplied in 2012/13. However, most of the increased planting area will be at the expense of soybeans—which could put edible oil markets under upward price pressure,  given weather-related late plantings in South America, cyclical declines in East Asian palm oil output, and increased demand for biodiesel production. 

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Implications of slow growth in high-income countries for developing countries

Submitted by Theo Janse van Rensburg on Tue, 2012-04-03 09:20









In an earlier blog-post, I have argued that even as developing countries’ potential growth rates have disconnected from those of high-income countries (due to strengthened domestic policy frameworks), the cyclical component of their economies have become more synchronized (largely as a result of their participation in global trade almost doubling in the last 20 years).
This brings the question how slow growth in high-income countries will impact developing countries. Simulations conducted on the World Bank’s macroeconometric model indicates that for every 1 percentage point decline in high-income countries’ demand, developing country exports may fall by as much as 2.2 percent, while output may decline by about 0.8 percent. Output declines by less than exports for two major reasons, firstly, exports represented only an estimated 30% of developing country output in 2011 and, secondly, because imports also decline due to the re-export nature of much of their trade. 

Regions that have significant (largely non-commodities) trade with high-income countries, such as East Asia and the Pacific (EAP) and Sub-Saharan Africa (SSA), are likely to experience the steepest decline in export volumes, while the Middle East and North Africa (MENA) region will be least impacted. In regions where exports constitute a relatively large share of output and/or where the initial shock to exports is relatively large, the overall impact on GDP is most severe, and vice-versa. In the simulation, a 1 percent decline in high-income GDP is likely to reduce output in EAP by about 1¼ percentage points, not only due to the region’s inter-connectedness with global and high-income markets, but also as trade represents a large share of overall output. In contrast, output is likely to decline by only 0.32 percentage points in MENA, largely because of the region’s small export share in total output.1


1. The World Bank econometric model’s export elasticity estimates are largely consistent with results observed in economic literature. Indeed, estimates of developing country export sensitivities to changes in their trading partners’ income vary significantly by country. In an earlier study of some 75 countries, Senhadji and Montenegro (1999) found long run elasticities ranging between 0.17 in Ecuador to 4.34 in Korea. Milberg and Wilberg (2010), in a 16 country study of export sensitivity to US GDP changes, found elasticity estimates ranging between 0.77 (for Taiwan) and up to 8.65 for China. Razmi and Blaker (2008), in a study of 18 developing countries, obtain estimates ranging between 0.21 for Mauritius and 4.1 for China. These differences in results are largely a function of different countries in their respective samples, the differences in the commodity composition among countries (hence the differences in sensitivities to external shocks) and different methodologies underpinning the results. Nonetheless the results from the World Bank model are broadly consistent with the results that Asian economies, due to their greater vertical integration with global supply chains are likely to be more sensitive to changes in incomes of high-income countries than those from Sub Saharan Africa.

Prospects Weekly: Financial market volatility is at its lowest since 2007

Submitted by Global Macroeconomics Team on Tue, 2012-04-03 08:37













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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Prospects Weekly: Developing-country bond issuance recovered strongly; business sentiment continues to improve

Submitted by Global Macroeconomics Team on Mon, 2012-03-12 18:52













Developing-country bond issuance has recovered strongly in early 2012, benefitting from favorable market conditions, including lower spreads. Overall gross flows to developing countries remain 9% lower than at the same stage of 2011, as IPOs and syndicated bank-lending remain weak, with lending to Emerging Europe depressed due to restrained supply from Western European banks. Meanwhile business sentiment continues to improve in most developing countries. Nevertheless, PMIs remain below year-ago levels with the exception of Sub-Saharan Africa. Ample global supply is likely to mute the impact on global cotton prices of the recently imposed ban on Indian cotton exports.
A tale of two debt markets. Syndicated bank lending to developing countries remains weak, with January-February lending down 63% from the same period in 2011. Lending to Emerging Europe has been particularly weak, due to deleveraging among Western European banks. So far this year, there has been no syndicated lending to Russia, versus $4 billion during the same period of 2011. In contrast, developing-country bond issuance rose to a record $50 billion during January-February, up 20% from 2011, with a 43% gain recorded in Latin America. Strong Latin American bond issuance partly reflects a move by larger firms in the region toward bond issuance to compensate for very weak bank lending and moribund IPO markets. 
Business sentiment improved in most developing regions in February, but remains well below year-ago levels. Business sentiment consolidated the gains made in January in all developing regions with the exception of Europe & Central Asia, where Purchasing Managers’ Indexes (PMI) have continued to decline. Turkey’s PMI fell a cumulative 2.4 points in January and February to below 50 (the growth-no growth mark). East Asia & Pacific saw only muted gains, largely due to downbeat sentiment in China where the PMI has been below 50 during 7 out of the past 8 months. Despite recent improvements PMIs remain well below levels observed in early 2011 in all regions except Sub-Saharan Africa, where the PMI rose to the highest level in almost two years, mainly reflecting improved sentiment in South Africa.  
On March 5, 2012 the Indian government banned all cotton exports, including exports already registered but not yet shipped. Following the announcement, cotton prices spiked but then returned to earlier levels. This was the second time India has banned cotton exports in recent years. It did so in April 2010, which may have contributed to the 2010 spike in cotton prices as India accounts for 15% of global cotton exports and 22% of global production. The ban came shortly after the government of China initiated an aggressive restocking policy that caused an uptick in cotton prices in January 2012. The ban is not expected to have lasting impacts on global cotton prices due to ample supply. Global cotton production and stocks are expected to increase 7% and 33% this year. The Prime Minister has called for a reassessment of the ban as early as Friday March 9th. Should the ban be sustained disruptions will be concentrated among major clients for Indian cotton, such as Bangladesh because of the time it will take to find new supplies. 

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