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Global Economic Prospects 2013

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Prospects Weekly: Private capital flows to developing countries eased in October

Private capital flows to developing countries eased in October, but remain close to their highest level in more than a year, led by robust bond issuance by emerging market sovereigns and firms. Business sentiment has strengthened in some countries, including the US and several emerging markets, but remains weak in general amid US “fiscal cliff” and Euro Area risks. In the US, new discoveries and innovations have pushed down domestic prices of natural gas, creating arbitrage opportunities between domestic and international markets.
Private capital flows to developing countries remain high, despite easing in October. Gross international capital flows to developing countries equaled $49 billion in October, the second highest inflow over the past 15 months, but down from the record $71bn of inflows during September. Euro Area debt turmoil in May caused capital flows to slow, but stabilization of financial market tensions and high-income monetary policy prompted the recent uptick in flows. Bond issuance was particularly strong at $32 billion in October, with 44% of the total destined for the financial sector. Notable issues included a $2 billion bond sale by Russia’s Sberbank, a $1.5 billion offering of 10-year sovereign bonds by Chile, and a $500 million sale by Bolivia (its first in nearly a century). New equity issuance and bank lending (especially to Emerging Europe and Latin America) moderated, partly because low bond yields made bonds a more attractive option for some borrowers.

 
Business sentiment indicators have strengthened in several countries, but remain weak in general amid risks to the global economy. Manufacturing Purchasing Managers’ Indexes (PMIs) for October suggest a strengthening of activity in the US as labor and housing markets continue to improve. PMIs also gained ground and suggest expansion in Brazil, Indonesia, India, Russia, and Turkey. In China, however, both the official and Markit PMI are below or close to the no-growth 50 threshold despite recent accelerations in industrial activity. Similarly, the manufacturing PMI for both core and periphery Euro Area countries points strongly toward further contraction, despite a stabilization and even small gains in industrial activity during recent months. Business pessimism may be reflecting market worries that the U.S. fiscal cliff or Euro Area tensions could flare up dampening demand and prospects—a view seemingly supported by weak sales of capital goods.

 
The wide gap between U.S. natural gas prices and European natural gas and crude oil prices suggests downside risks on oil prices. The post-2005 increase in crude oil prices induced innovation in both natural gas and oil extraction technologies such as horizontal drilling and hydraulic fracturing. A 28 percent increase in U.S. natural gas production between 2005 and 2011 has depressed domestic prices. Low prices have induced electrical and petro-chemical producers to substitute natural gas for coal, but a similar shift by the transportation industry has yet to take place, in part due to the absence of distribution networks and safety concerns. So far, export licensing requirements have prevented U.S. producers from selling into world markets where natural gas prices are much higher. U.S. natural gas costs only 29 and 20 percent as much as European and Japanese gas. Should licenses become more readily available, the arrival of US gas on international markets could exert significant downward pressures on international prices of both natural gas and crude oil.

 

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Prospects Daily: US treasuries gained and the benchmark 10-year bond yield edged down

Financial Markets…US treasuries gained and the benchmark 10-year bond yield edged down 1 basis point to 1.66%, after rising as high as 1.7% earlier, while the 30-year bond yield slid by 2 bps to 2.83% in early Friday session after a government report on wholesale price in September showed domestic inflation remained muted.

The euro advanced 0.3% to $1.297 after dropping to a 10-day low of $1.283 yesterday, and it gained 0.4% to 101.7 yen amid speculation that a downgrade of Spain’s sovereign rating would put pressure on the government to finally request a sovereign bailout.

Spanish government bonds rose and 10-year Spanish bond yields fell 9 basis points to 5.67%, gearing for the lowest level in nearly a month, on the prospect of European Central Bank intervention to support its debt.

High-income Economies…Euro Area industrial production rose 0.6% (m/m) in August, the same pace as that recorded in July, with increases in France (+1.5% m/m), Italy (+1.7%), Spain (+1.3%), and Greece (+2.5%) offsetting a 0.4% fall in Germany, Eurozone’s largest economy. Despite the monthly increase, Euro Area industrial output was 2.9% lower in August compared to the same month in 2011.

 The US Thomson Reuters-University of Michigan consumer sentiment index rose to 83.1 in October, the highest in five years, from 78.3 in September as consumers’ optimism about the overall economy improved.

US producer prices rose 1.1% (m/m) in September following a 1.7% rise in August, mainly due to an increase in gasoline prices. On a year-on-year basis, however, overall PPI inflation edged up to 2.1% from 2.0% in August. Core PPI which excludes food and energy remained flat compared to the previous month.

France’s current account deficit widened to 4bn euros in August from 2.6bn euros in July, as the trade deficit rose with an increase in energy-led imports offsetting an improved exports performance.

The Netherlands’ trade surplus narrowed to 2.2bn euros in August from 2.95bn euros in July, as imports rose +2.2% (m/m) from robust domestic demand, while exports fell 0.5%.

Singapore's GDP growth slowed to 1.3% (y/y) in the third quarter from 2.3% recorded in the second quarter, pulled down by a 1.5% (q/q) contraction driven by a decline in the manufacturing sector’s electronics cluster due to weak external demand.

Slovakia’s consumer price inflation eased to 3.6% (y/y) in September from 3.7% in August led by a slower pace of increase in utility prices.

Developing Economies…Bulgaria's consumer price inflation accelerated to 4.9% (y/y) in September from 3.9% in August, partly due to a sharp increase in food and fuel prices. Prices continue to advance rapidly in the second half of 2012 following an earlier period of decline.

India’s industrial production increased 2.7% (y/y) in August following a 0.2% contraction in July, led by a 5% growth of consumer goods production. India’s consumer price inflation eased to 9.7% (y/y) in September from 10.0% in August driven by a small decline in food inflation.

Malaysia's industrial production declined 0.7% (y/y) in August following a 2.9% increase in July, as manufacturing sector continued to struggle in the face of weak external demand.

Mexico’s industrial output growth slowed to 3.6% in August from 4.9% (y/y) in July, pulled down by a 0.8% (m/m) contraction in August, mirroring industrial developments in the United States.

The central banks of Indonesia, Peru and Singapore held their respective policy rates unchanged this week.

Prospects Weekly: Q3 Euro Area GDP growth remained positive

Despite escalating debt concerns, Q3 Euro Area GDP growth remained positive mostly on account of robust growth in the two largest economies Germany and France. Q3 GDP growth was even stronger in the US, Japan and China (all of which benefitted from the post-Tohoku bounce back), with consumer spending also being an important growth driver. Reflecting weak consumer spending in the Euro Area, retail sales fell in October. Forward looking indicators suggest that growth prospects for the Euro Area remain dim, and with the EU being a major trading partner for many countries this reduces prospects elsewhere. In anticipation of the slowdown, monetary policy tightening has declined significantly in developing countries, although tightening continues where inflation remains above-target.
Euro Area member states grew modestly and unevenly in Q3, but recession looms ahead. Euro Area GDP was up 0.8% (q/q, saar) in Q3. Much of the increase was driven by Germany (2%, q/q saar) and France (1.6%, q/q saar), while periphery countries registered significant declines. Q3 GDP growth was even stronger in the US (2.5%, q/q saar) and Japan (5.5%, q/q saar). Reflecting uncertainty related to the debt crisis and fiscal austerity across the Euro Area, Q4 growth prospects for the Euro Area are dim. European business surveys in October show production and order books pointing towards recession, while stocks of unsold finished goods remain high. The EC forecasts Euro Area Q4 GDP to contract by 0.4% (q/q, saar) and to stagnate in 2012 Q1. Developing country exports to the EU will be impacted.

 

Strength of consumer spending diverges across regions. Consumer spending in the third quarter provided significant support to GDP growth in Germany, France, and the United States (1.72 percentage point contribution to GDP). October releases of retail sales data show momentum growth on the upside for the United States (supported by a pick-up in consumer sentiment since August and moderate job creation), and moderating in China and Japan (where retail sales growth is stabilising from the post-Tohoku bounce back). However, retail sales in the Euro Area declined in October, with momentum growth dipping towards a deceleration, as consumers faced with job fears related to the ongoing Euro Area debt crisis and fiscal austerity, hold back on spending.

 

The pace of monetary tightening in developing countries slows. As inflationary pressures abate and the global economy slows down, the number of developing countries tightening monetary policy has fallen sharply. In recent months some of the larger developing countries (Brazil, China, Indonesia, Russia, and Turkey) have moved from tightening to a neutral or looser monetary stance. Elsewhere, interest rate hikes continued in developing countries where inflationary expectations remain elevated (Bangladesh, India, Kazakhstan, Ethiopia, Nigeria, Tanzania, Vietnam) and where price pressures continue to be felt (e.g in East Africa). Indeed, interest rates in Kenya and Uganda have been increased by atleast 800bps over the past two months.

 

Source: Thomson Datastream and World Bank DEC Prospects Group

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Prospects Weekly: Capital flows to developing countries rebounded stongly in 2010

Although capital flows to developing countries were up 45 % in 2010, most of the increase was concentrated in a few middle-income countries. Flows to developing Europe and Central Asia remain sharply compressed.  Developing countries continue to grow as a source of FDI to both high-income and other developing nations. Importantly, the recovery in developing country GDP has reflected growing domestic demand and occurred despite weak import demand from high-income countries.
Capital flows to developing countries rebounded strongly in 2010, but remain well below their 2007 peaks – especially as a percent of developing-country GDP. Total net capital flows to low and middle-income countries in 2010 amounted to $510 billion—up 45% from the $353 billion registered in 2009, but still almost 50 percent lower than the $1.1 trillion received in 2007. As a percent of developing country GDP, the increase was less striking, from 3.7 percent of GDP in 2009 to 4.4 percent in 2010, versus 8 percent in 2007. The rebound was concentrated among a few economies (Brazil, China, India, Indonesia, Malaysia, Mexico, South Africa, Thailand and Turkey). These countries saw flows rebound from 3.2 to 4.3 percent of their GDP. Flows elsewhere also rebounded in value terms, but less strongly, from $167 billion to an estimated $230 billion in 2010. Although flows to developing Europe and Central Asia picked-up in 2010, at 3.5 percent of GDP they remain sharply depressed compared with their pre-crisis levels of 14 percent of GDP.
Developing countries are a growing source of FDI inflows to other developing countries. FDI inflows emanating from developing countries reached 34% of all FDI received by developing countries in 2010, up from 28% in 2004. FDI originating in developing countries now represents an estimated 13% of the FDI received by high-income countries, versus 8% in 2004. Developing countries have also come to represent a key source of funding for high-income sovereigns. For instance, as of late 2010 developing countries held over a third of all outstanding US government securities, although this share was down somewhat from their 40 percent share in late 2009. China was responsible for over 60% of this total.

The economic recovery in developing countries mainly reflected a rebound in their own demand levels.  Outside of developing Europe and Central Asia, most developing countries have recovered or are close to closing output gaps and are growing at close to pre-crisis rates. This is a remarkable achievement particularly as the recovery in high-income countries has been weak. The upturn in developing economies mainly reflects a rebound in their own domestic demand. Their exports remain some 7% below pre-crisis trends. In contrast, strong demand in developing countries has contributed to the recovery in high-income countries, with developing country imports some 8% higher than pre-crisis trends. Overall developing countries were responsible for almost half of global growth in 2010.

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Prospects Weekly: Advanced indicators for industrial production are mixed

Following a period of weak growth mid-year, advanced indicators for industrial production are mixed. Purchasing manager’s indexes point to increased strength, but export order-books remain weak. The dollar value of global remittances is estimated to have increased 6 percent in 2010, regaining the $325 billion level recorded in 2008. Remittances are expected to expand a further 6.2 percent next year and 8.1 percent in 2012.  Low interest rates in high-income countries are placing upward pressure on exchange rates in some developing countries. Some affected countries have reacted by accumulating reserves and taking steps to limit inflows and liberalize capital outflows.
Advanced indicators for fourth quarter industrial production are mixed. Some indicators suggest that the near stalling of global industrial production mid-year may be coming to an end. The pace of growth in industrial production in China, which came close to zero during the two months ending June 2010, is now back to more than 12 percent. While momentum growth rates in the U.S. and Europe remain weak and some smaller economies continue to suffer from post-crisis restructuring, forward-looking purchasing manager’s indexes for the globe’s largest economies point to an expansion of output. This result is consistent with indicators of strengthening retail sales, but is countered by data pointing to continued weakness in export order books. 
The dollar value of remittances rose 6 percent in 2010, reaching $325 billion — the same level as in 20081. After falling 5.5 percent between 2008 and 2009, remittances to developing countries are estimated to have rebounded by 6%. The rebound has brought remittances to countries in the East Asia & Pacific and South Asia regions above their 2008 levels, but has left them broadly unchanged in the Middle-East and North Africa and Sub-Saharan Africa regions. Remittances to Europe and Central Asia and Latin America remain relatively depressed, partly reflecting persistent economic weakness in high-income Europe and the United States — major sources for these two regions. The real local currency values of remittances generally rose by less because of dollar depreciation. Corrected for inflation and exchange rate movements the population-weighted real value of remittances is still down 4.6 percent  since 2008. 

Some countries facing upward exchange rate pressure are taking steps to limit disruptive and potentially destabilizing capital inflows and currency movements.  China, Brazil, South Africa and Turkey are among countries enduring the strongest pressure on their currencies (proxied by real-effective exchange-rate appreciation, changes in reserve to GDP ratios, and interest rate differentials). Countries have responded by accelerating the accumulation of foreign currency reserves (China, Colombia, Turkey, South Africa ), taxing or quarantining short-term flows (Brazil, Indonesia, Thailand), reducing limits on outflows (Chile, China, South Africa) and other administrative measures (Russia).

1Migration and Development Brief #13, November 2010

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Prospects Weekly: China's growth remains robust in Q3-2010

China posted strongly positive real GDP growth in Q3-2010, fueled by a rapid expansion in domestic demand. The government has responded to signs of tightness, including a firming of inflationary pressures, by hiking policy rates—although real interest rates remain slightly negative. Reflecting the slowdown in industrial output mid-year, world oil consumption decelerated in Q3-2010. Nevertheless, oil prices have firmed since late-September, largely due to US-dollar weakness and investor search for yield. Based on latest available year-to-date data, FDI inflows to developing countries are expected to rise 17% in 2010 on a revival in M&A, supported by low funding costs. In contrast, FDI flows to high-income countries are expected to fall 4%, reflecting weaker short and medium-term growth prospects.
China reported vibrant 9.6% y/y real GDP growth in Q3-2010, despite policy normalization. he overall growth figure reflects strong domestic demand and is consistent with a pick-up in industrial production (7.9% in Q3, q/q, saar) following the pause in growth in the summer (3.9% in Q2). Robust retail sales and PMI surveys in September also underscore vibrant domestic activity. Inflationary pressures have picked-up slightly to 3.5% in Q3, up from 3% in the previous two quarters (q/q, saar). The contribution of net exports to growth was likely negative in Q3—with goods export growth slowing sharply to 4.1% from 33% in Q2, while imports rebounded to 9% after declining 7% in Q2 (volumes, q/q, saar). This better-than-expected performance is likely to be reflected in an upward revision to the Bank’s forthcoming growth forecast for China1. 
World oil demand declined in Q3-2010, in line with the slower pace of the recovery and efforts in China to improve energy efficiency. Global demand increased 0.4mb/d, just somewhat stronger than its average increase of 0.33mb/d during 2000-2007. For the year as a whole, oil demand is projected to average 87.3mb/d, about 1% above the 2007 pre-crisis peak. Despite the slower demand growth and still ample spare capacity, the price of oil has risen—from $76/bbl in Q3-2010 to $81/bbl (as of October 28, simple average of Brent, Dubai and WTI)—partly reflecting the depreciation of the US-dollar and financial investor interest. 

FDI flows to developing countries (LMICs) are expected to rise 17% in 2010. The pick-up reflects both stronger M&A and Greenfield investment, and was likely supported by low funding costs in high-income countries (HICs) due to quantitative easing. Particularly large gains were recorded in East Asia and Pacific (China, Indonesia, Malaysia) and Latin America (Chile, Mexico). Europe and Central Asia (Bulgaria, Romania) and South Asia (India) saw slight declines in flows. FDI flows to HICs appear to have declined 4% since 2009 on sovereign debt concerns and weaker short and medium-term growth prospects. The aggregate figure reflects large divestments from some countries (Belgium, Iceland, U.K., Ireland). Overall, LMICs’ share of FDI flows is estimated to have increased to 37% in 2010—up more than three-fold since 2000. FDI flows to HICs and LMICs remain 60% and 30%, respectively, below their respective pre-crisis peak flows (posted in 2007 and 2008).

1China Quarterly Update, November 2010 (scheduled to be released in early-November). 

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