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Global Economic Prospects 2013

Global economy remains fragile; high-income countries suffering from slow growth. Read more ...

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Industrial Output

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.

Prospects Weekly: Record high auto sales, G-20 face sharp fiscal adjustment, emerging market bond spreads down but yields up

The rebound in global output during the second half of 2009 was buoyed by “cash-for-clunker” incentive programs that propelled global car sales to a record high. As these programs have begun to expire, the pace of industrial production growth is expected to moderate in the coming months. High levels of public debt will require large—although not unprecedented—fiscal adjustments in many high-income countries over the next 20-years. Emerging market bond yields have climbed since late-2009, due to higher yields on benchmark U.S. Treasuries, although their spreads have remained broadly stable during the period. As U.S. bond yields increase further with the reversal of the Federal Reserve’s monetary stimulus measures, emerging market bond yields are likely to rise as well. 
 

Auto sale incentive programs supported record high global auto sales and a rebound in industrial production. Some countries that witnessed a marked revival in manufacturing activity in the second half of 2009 had car sale incentive programs. As these programs have recently expired in the U.S., Korea, Australia, and in most Euro Zone countries—or are about to in Brazil, India, and the U.K.—momentum growth in industrial production is expected to slow in the months ahead. This, alongside adverse weather conditions, appears to have been a contributing factor in the recent loss of momentum in industrial output in Germany. By effectively front-loading demand, these programs pushed global car sales to an all-time high of 54.3mn units in January 2010 (seasonally adjusted annualized rate, JP Morgan).

 

Many G-20 countries face significant fiscal adjustment. High government debt and aging populations will force many high-income countries (HICs) to undergo sharp fiscal consolidation over the next 20-years. The IMF estimates that—to regain a sustainable 60% debt-to-GDP ratio—the HIC G-20 will need to adjust primary fiscal balances (excluding interest payments) from a deficit of 3.5% of GDP in 2010 to a surplus of 4.5% by 2020 and then maintain a 4.5% surplus through 2030 (i.e., cut spending or raise revenues by an average of about 6% over a 20-year period). While challenging, such large adjustments are not unprecedented. For most developing countries (LMICs) no such adjustment will be required, as their debt ratios are much lower—40% in 2010 for the LMIC G-20 vs. 107% for the HIC G-20.

 
Emerging market bond spreads have declined from recent peaks in October 2008, although they remain about 80 basis points above the level posted during the 18-month period ending in June 2007. While bond spreads have been broadly stable since October 2009, benchmark U.S. Treasury yields have increased 50 basis points since end-November, pushing up the cost of capital for developing countries. Looking ahead, as non-traditional monetary stimulus measures (which have kept down medium-term interest rates in the U.S.) are withdrawn, developing country bond yields are expected to rise further—although perhaps not on a one-to-one basis with the rise in the cost of U.S. bonds.

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