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Global Economic Prospects 2013

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Prospects Weekly: Renewed Euro Area tensions cut into capital flows to developing countries in May and June

Renewed Euro Area tensions cut into capital flows to developing countries in May and June, and prompted a sharp downturn in business sentiment worldwide. Together these developments point to slower growth in 2012Q2 and Q3, unless recent improvements in financial markets and policy steps cause business sentiment to strengthen. Falling industrial commodity prices, notably oil prices, may mitigate impacts for importing countries, but will exacerbate strains on government revenues in commodity exporting nations.
Capital flows to developing countries picked up slightly in June after falling sharply in May due to renewed Euro Area tensions. The resurgence of Euro Area turmoil in May caused gross capital flows to developing countries to fall by a revised 45% in May (solid line in figure). The bulk of the decline was in bond and equity issuance, as borrowers may have voluntarily delayed going to market given heightened uncertainty. In June, total gross capital inflows picked up somewhat. Perhaps surprisingly, in the most recent period syndicated bank lending has held up (despite European banking-sector deleveraging). Overall, inflows in May-June are down 36% from the levels observed in the first four months of the year. Should capital flows remain depressed they could contribute to weaker investment and growth in developing countries in the second half of the year.

 
The financial turmoil in the Euro Area has cut into business sentiment worldwide. Purchasing manager indexes (PMIs) published by national sources and Markit deteriorated further in June. The global indicator descended into sub-50 territory, suggesting that global output shrank in June, with all economic regions weakening (except China whose official PMI improved slightly). A similar decline in PMIs occurred in the second half of 2011, when Euro Area tensions rose in July of that year. Perhaps, reflecting lessons learned from that earlier episode, the deterioration has been quicker and more marked this time around. The decline in sentiment is consistent with a scenario where firms and consumers are holding back on expenditures because of increased uncertainty. Economic outturns for the second and third quarters of 2012 will depend critically on whether confidence remains weak or begins to strengthen in response to recent policy steps.

 
Euro Area tensions and global growth concerns have accentuated downward pressure on industrial commodity prices, notably oil prices. International prices of crude oil and other industrial commodities have been on a downward trend in recent months, reflecting strong supply growth and weak demand. The initial easing in prices occurred even as global economic activity was firming, but has accentuated with financial market tensions and expectations of weaker growth. As of July 3rd, international crude oil prices were $25 lower than their first quarter highs, and copper and aluminum prices were down 10 percent and 16 percent respectively. Internationally traded wheat prices have strengthened in recent weeks amid concerns that high temperatures may reduce global supplies, especially from key exporters including the United States and Russia. Compared with a year ago, wheat prices are up 15 percent and maize prices are up 14 percent. While lower oil prices will help to cushion the real-income effects of weaker GDP growth in most developing countries – lower oil and metal prices can be expected to cut into incomes and government revenues in exporting countries, exacerbating the downturn in those economies.

 

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Prospects Daily: Bank deposits are moving out of riskier European countries

Important developments today:

1. Bank deposits are moving out of riskier European countries.

Prospects Weekly: Global financial markets are eager for policy action

Global financial markets are eager for policy action. Bond yields for high-spread Euro Area sovereigns remain high, but eased somewhat this week with successful bond issuances by France and Spain and optimism that EU leaders will reach agreement to resolve the debt crisis at the forthcoming December 9th EU summit. Global equities posted a rally in response to coordinated action by five central banks to cut dollar-funding costs. Developing country industrial output growth remains weak outside of China, where growth has proven resilient. Various factors are contributing to slow outturns for developing regions, including the unwinding of rebound effects from the Tohoku disaster and strong headwinds from high-income Europe. Activity in high-income countries is mixed, with negative growth in the EU, slowing growth in Japan (well above trend) and the United States (below trend), and strengthening in some other smaller high-income countries. Inflation in developing countries appears to have peaked and has been easing in recent months, partly due to previous monetary tightening. Inflation remains low in high-income countries, but has risen on fading disinflationary oil-price-impacts.

 
Bond yields for high-spread Euro Area sovereigns remain sharply elevated, but have eased on optimism ahead of next week’s EU summit. Successful bond auctions by France and Spain on December 1st sent yields lower across the Euro Area. Nevertheless, Spain’s 5-year borrowing cost climbed to 5.54% at the auction that raised €3.75bn ($5.1bn), converging toward the 5.74% 10-year yield. While Italy’s borrowing costs jumped above 7% at its auction on November 29th, they have retreated to 6.68% in the interim. A coordinated move by five central banks to cut dollar-funding costs supported market sentiment this week.

 
Excluding China, industrial activity in developing countries fell at a minus 1.5% pace during the three-months ending September (3m/3m, seasonally adjusted, annualized rates). Latest readings for all developing regions are negative or decelerating, with the exception of Sub-Saharan Africa, which posted zero growth in August after minus 4.1% in July. Output in East Asia and Pacific, excluding China, slowed sharply to 4.2% in September from 13.2% in the month prior (China posted a solid 10.4% rate in October). The weak output data reflects various dynamics, including an abating impetus from Japan’s post-disaster rebound and the influence of floods in Thailand, where production fell 34% in October. Excluding the European Union and Japan, industrial output in high-income countries strengthened to 2.4% in September from 1.4% in the month prior, led by gains in high-income East Asia (Singapore) and oil exporters (Saudi Arabia). U.S. industrial output growth slowed to 1.3% in October (from 3.9% in July), partly due to rising headwinds from Europe. PMI surveys continue to point to weaker global activity ahead.

 
Lower commodity prices, lagged impacts of monetary policy interest rate hikes and slowing growth have contributed to lower inflation in developing countries. Headline inflation decelerated most markedly in East Asia and Pacific (to 4.4% in October from 6.6% in August, 3m/3m, saar) and in Europe and Central Asia (to 7.8% from 9.6%). China’s central bank reduced reserve requirements (the first time since 2008) and Brazil’s central bank introduced a policy interest-rate cut. Nevertheless, South Asia and Latin America and the Caribbean remain high at 8.2% and 8% in September and October, respectively. In high-income countries, inflation rose to 2.2% in October (3m/3m, saar). This compares with a recent low of 1% in August (3m/3m, saar) and partly reflects a waning disinflationary impulse from falling energy prices—as core inflation has remained relatively stable. Inflation is up across EU countries, with few exceptions. Portugal, Greece, Spain and Italy are among those recording larger increases, which likely reflects administered price increases aimed at fiscal consolidation.

 

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Prospects Weekly: Financial market volatility remains sharply elevated

Financial market volatility remains sharply elevated this week as market attention shifted from Greece, to Italy and even France. Concern about counterparty risk kept European banking-sector spreads high, even as banks mark-down and sell-off distressed Euro Area sovereigns to repair their capital base. Continued turbulence and credit tightening could prompt sudden reversals in global capital markets. In 2012, developing country external financing requirements are estimated at $1trn (7.1% of GDP), of which two-thirds is accounted for by short-term debt. Developing Europe and Central Asia, with debts coming due equal to 7.6% of GDP, is the developing region most vulnerable to a tightening of financial conditions. Worries about faltering world demand, led by expectations of recession in Europe, have contributed to deep declines in international commodity prices.

World Bank publishes latest commodity prices: February 2011

John Baffes's picture

Commodity prices (measured in U.S. dollars) rose strongly in February 2011.  Energy prices rose by 4.2% and non-energy prices increased by 4.8%.  Food prices were up by 2.9%; beverages jumped by 8.1%; raw materials prices soared by 10.3%; metals gained by 4.2%. The US dollar depreciated 2.1% against the euro and 0.8% against a broad index of currencies.

Download long-term historical price series here (Excel) and recent commodity prices (Pink Sheet) here.

Look out for next week's posting on Global Commodity Watch which will provide indepth analysis on these prices and commodity price forecasts.

 

 

Indices of Nominal US$ Prices, Percent  Changes (January to February 2011)
Source: The World Bank

 

Prospects Weekly: Broadening recovery in the U.S. and Japan; downside risks in Europe

So far, the spread of the sovereign stress in highly indebted high-income European countries to developing countries has been limited, due to stronger fundamentals in these economies and the massive EU/IMF intervention. The longer-term implications of the crisis will depend on the credibility of consolidation efforts and the extent that market worries spreads to other EU countries. The sovereign tensions and concerns over impacts on global demand caused commodity prices to decline, in particular oil and base metals. In the U.S. and Japan the recovery is gaining a broader base, pushed forward by rising domestic demand abetted by an improving labor market. In contrast, growth in Europe remains fragile and dependent on exports. Further fiscal tightening; lower consumer and business confidence; and depressed bank lending in the Euro area (made worse by the sovereign crisis) threaten to derail the timid recovery underway there.
Contagion from EU to EM countries? The massive EU/IMF intervention is the latest attempt to stop the crisis in Greece from spreading to other highly-indebted EU countries. The impact on developing countries will depend on the degree of contagion within the whole of the EU. So far, CDS spreads in major developing countries have not reacted much. The direct trade link is concentrated in a few relatively small countries. However, weaker growth in EU countries could further delay the recovery in Central Europe, the region with strongest trade links. Beyond trade, global markets are expected to remain volatile and relatively risk averse. Moreover, as the second round of tensions that erupted this week attests, a broadening of the crisis with potential serious consequences for global growth cannot be ruled out.  
Oil and metal prices decline on Euro debt crisis. Crude oil prices (World Bank average) reached nearly $87/bbl on the first trading day of May and then plunged almost $10/bbl. Although the initial declines were sparked by the sovereign debt crisis, the decline in prices was supported by supply conditions. Oil inventories are high and rising once again, particularly in the United States. Many base metal prices dropped more-than 10% in early May due to the sovereign crisis and its potential impact of metals demand. Prior to the plunge, metals prices had risen 6 out of the previous 7 months, reflecting destocking and recovery of demand, and restocking outside China. Metals prices are up 156% from end-2008.  
Broadening recovery in the U.S. and Japan; downside risks in Europe. GDP in the U.S. grew 3.2% (saar) in the first quarter, with a sustainable expansion in domestic demand increasingly driving the recovery. Improving labor markets have supported a rotation of growth towards personal consumption and investment, while net exports contribution to growth turned negative and that of stock building eased dramatically. Consumer demand accounted for 80% of the increase in output. GDP in Japan expanded 4.9% in the quarter (saar) also supported by domestic demand. In contrast, growth in Europe registered just 0.8% (saar). The economy still seems dominated by bounce-back factors (external demand and inventories), with limited support from consumer and investment demand. Though advanced indicators point to improving prospects, fiscal tightening and uncertainty from the debt crisis are likely to weigh on growth in the second quarter.  

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