Malaysia

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.

Important developments today:

1. Eurozone growth projected to slowdown sharply in 2012

Eurozone growth projected to slowdown sharply in 2012. Battered by the spreading sovereign-debt crisis in member states, waning consumer and business confidence which could impinge on durable and investment goods spending, ongoing fiscal austerity, and a slowdown in global trade, the recently released European Commission Autumn economic forecasts points to a significant slowdown in GDP growth in the EU. Annual GDP growth in 2012 for the 17-bloc Eurozone is projected at 0.5%; and 0.6% for the 27-member EU.  Though picking-up in 2013, growth is still expected to remain lack-lustre, rebounding to 1.3% and 1.5% for the Eurozone and EU respectively. The risks to the forecasts are noted to be tilted to the downside with the possibility of further negative dynamics of slower growth affecting sovereign debtors, which could in turn deteriorate bank balance sheets, thereby reducing their ability to support growth and thus leading to a recession.

Among Emerging Markets

In East Asia and the Pacific, Malaysia’s central bank kept the key interest rate unchanged at 3% at the latest monetary policy meeting. Despite pressures on domestic consumer prices from food shortages after recent floods, the bank announced plans to maintain the current interest rate in view of external economic slowdowns.

In Central and Eastern Europe, Turkey’s industrial production grew 6.9% in September, gaining 12% on the year, beating all market forecasts as broad based expansion in manufacturing (12.8%), utilities (9.9%) and mining (2.2%) boosted the headline figure. The pace of growth in industrial output is the highest since February, underscoring the fast momentum of growth in the economy.

In South Asia, India’s industrial output growth slowed sharply to 1.9% in September, a two-year low, as the central bank’s string of interest rate hikes took effect on the economy. While manufacturing production grew modestly by 2.1%, output of key capital equipment and consumer goods shrank, raising concerns that the overall pace of growth may slow. The Reserve Bank has raised interest rates 13 times since March 2010 to control inflation, which remained high at 9.72% in the last reading, and signaled that it may pause interest rate tightening after last month’s 25 basis point increase.

In Sub-Saharan Africa, Ethiopia’s annual inflation was recorded at 39.8% in October, easing slightly from 40.1% recorded in September. Month-on-month inflation has been slowing in the country, at 1.9% in October from 2.6% in September, however a poor agricultural year and surging food costs are likely to keep inflationary pressures a concern this year.

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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