Romania

Prospects Daily: Japan’s GDP contracts at annualized 3.5% (q/q) in third quarter

Financial Markets…Global stock markets fluctuated between gains and losses, following three consecutive days of losses last week, as strong Chinese exports data in October offset worries over a prospect of the so-called U.S. fiscal cliff and Greek woes. The benchmark MSCI global equity index just slipped 0.04% in afternoon trading.

Spanish government bonds declined on Monday, pushing the benchmark 10-year yield to 1-month high of 5.88%, as European finance ministers prepared to discuss Greek aid amid growing concerns that the region’s debt crisis remains unsolved. The country’s 2-year borrowing costs also rose, climbing 9 basis points to 3.21%.

The Greek government announced on Monday that the nation’s banks will recapitalize by issuing stocks and convertible bonds and must meet a core Tier-1 capital adequacy ratio of minimum 6%. According to the recapitalization terms, the shares will be sold at a discount and the bond will carry a 7% annual coupon rate with a 0.5% increase per year.

China will further expand its quota for Renminbi Qualified Foreign Institutional Investors (RQFII) to US$80 billion from US$30 billion. This will allow the qualified foreign investors to use offshore yuan funds for investing in the country's capital market.

High-income Economies…Japan’s GDP contracted 0.9% (q/q) and fell at an annualized 3.5% (q/q) pace in the third quarter of 2012, the first such decline in three quarters. Slowing global growth and a territorial dispute with China (Japan’s largest trade partner) resulted in a 5.0% (q/q) drop in Japan’s exports in Q3, accounting for 0.7 percentage points of the 0.9% output drop.

The OECD’s composite leading indicators suggest signs of stabilization in the US, Canada, and China in September, with the index for the US rising to 100.9 from 100.8 in August, and Canada’s and China’s unchanged at 99.7 and 99.4 respectively. However, the Euro Area faces weaker growth prospects as leading indicators for the two largest Eurozone economies, Germany and France, fell, while prospects for Italy improved.

Germany’s wholesale price inflation rose to 4.6% (y/y) in October from 4.2% in September, mostly due to base effects. On a monthly basis, however, the index fell 0.6% (m/m), as a fall in fuel and mineral oil prices (driven by a drop in crude oil prices) offset a monthly increase in food prices.

Estonia’s GDP rose by 1.7% (q/q) in the third quarter of 2012, with year-on-year growth accelerating to 3.4% (y/y) from 2.2% in the second quarter. Construction, information and communication activities contributed the most to the GDP expansion.

Developing Economies…China’s October export growth accelerated to 11.6% (y/y) from 9.9% in September. October imports were up by 2.4% y/y – unchanged from September. China's October trade surplus increased to US$31.99 billion from September’s $27.67 billion. China's October bank lending eased to 505.2 billion yuan from September’s 623 billion yuan and M2 growth also slowed down to 14.1% (y/y) from September’s 14.8%.

India's industrial output contracted by 0.4% (y/y) in September compared to a 2.7% (y/y) growth in August, largely on account of a 12.2% decline in the capital good production. Meanwhile, the country's trade deficit hit a record high $20.96 billion in October with exports falling by 1.63% (y/y), while imports rose by 7.4%.

Mexico's industrial output revived in September growing at 0.9% (m/m) compared with a 0.8% contraction in August following a pick-up in US industrial activity and on the back of strong performance in manufacturing. Mexico’s industrial growth on an annual basis at 2.4% (y/y) in September is still below a 3.6% increase recorded in August.

Peru recorded a trade surplus of US$403 million in September after falling into a US$52 million deficit in August.

Romania's annual inflation slowed to 5% (y/y) in October from 5.3% in September on lower pace of increase in food prices. Inflation rate is still above the 2-4% annual target.

Russia’s GDP growth slowed to 2.9% (y/y) in the third quarter compared with a 4% growth in the second quarter, on weak external demand and a poor harvest related to a severe drought.

Important developments today:

1. European sovereign credit risk rises to eight-week high following Greek debt swap insurance payouts

2. Italy in recession

Important developments today:

1. Greek bond yields climb over 90% for the first time

2. U.S. manufacturing continues expanding

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).