global growth

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.

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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Last weekend the G-20 convened in Canada, and while recognizing that countries need to adjust fiscal accounts at different speeds, the high-income economies agreed to halve their fiscal deficits by 2013 and stabilize debt-to-GDP ratios by 2016. Planned budget cuts across the OECD through 2011 could amount to $560bn, or 1.4% of GDP. Monetary authorities in high-income countries are expected to hold-off on policy interest-rate hikes, given fiscal-consolidation efforts. But, developing-country rates are expected to continue to rise as recovery takes hold. As a consequence, rising interest rate differentials are likely to prompt a rise in carry trade activity and associated capital flows. An upswing in Euribor rates since May reflects heightened risk-aversion, concerns about European bank-exposures to bad debt, and an increase in funding demand as €442bn in ECB emergency-loans came due today. These concerns—combined with mounting evidence of a coming slowdown in global growth in 2H-2010—contributed to a sell-off in global equity markets, with the World MSCI down 4.3% in the last week (as of July 1).
The G-20 appears to have reached consensus on a “growth friendly” approach to budget cuts. IMF suggestions that “one shoe does not fit all” and the U.S. Administration’s view that recovery is too fragile for “traditional” budget cuts, received some support from the Europeans. Greece, Ireland, Portugal and Spain have announced measures to reduce budget shortfalls by some $82bn, or 4.5% of their GDP through 2011. Larger countries of Europe are also moving toward deficit reduction, with cuts amounting to $75bn. These range from 1.8% of GDP for Italy, 1.6% for the U.K. and 1% for France through 2011. The measures are targeted to achieve sustainable public sector debt-levels, and in turn hoped to stave off worse consequences from ongoing fiscal problems.
Large interest-rate differentials between developing- and high-income countries are likely to remain or widen, increasing carry-trade opportunities. While central banks in a handful of high-income countries (including Australia, Canada, and Norway) have recently raised short-term policy rates—many high-income countries are expected to refrain from raising rates until private sector activity has gained firmer footing, especially with plans to tighten fiscal policy. As monetary policy continues to tighten in developing countries, incentives to undertake carry-trades may intensify with investors borrowing short-term at lower interest rates in high-income countries to invest in higher-returning instruments in emerging markets—potentially generating unwanted and disruptive capital flows.
Euro interbank offer rates (Euribor) have risen since May and continued to increase today, as €442bn in ECB emergency loans came due. Funding pressures associated with the repayment (€199bn has been paid off) may have contributed to the recent climb in Euribor. However, a generalized increase in risk aversion, and specific fears about the solvency of some European banks may also have been at play. Of the €243bn of ECB debt that was rolled over, €111bn was put into six-day loans—suggesting that debtor banks still hope to repay this debt in the days to come using private-sector funding. How successful they are in doing so will be a key indicator of banking-sector health. As repayment-related demand eases, Euribor rates should begin to decline.