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Global Economic Prospects 2013

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Prospects Daily: Global stock markets rallied on Friday

Financial Markets…Global stock markets rallied on Friday, with the benchmark MSCI world equity index hitting a 20-month high level of 552.16, as positive economic data from the two world’s largest economies boosted market sentiment. Along with robust U.S. labor and housing market reports, China’s better-than-expected fourth-quarter GDP growth (y/y), buoyant industrial production and retail sales figures added to signs that the global economic recovery is gaining traction.

Japanese yen fell further against the dollar, sliding to a 2 1/2 –year low of 90.21 per dollar in early-morning New York trade, amid speculation the Bank of Japan may start open-ending asset buying program later this month. The yen has depreciated 13% versus the dollar in the past 3 months as the Japanese government signaled greater stimulus measures to boost slumping economy, which may lower the currency and stoke inflation.

U.S. Treasuries rose slightly on Friday, with the benchmark 10-year yields sliding 2 basis points from the highest level in a week to 1.87%, as growing concerns over the country’s debt ceiling debate revived demand for the safe-haven government securities. U.S. lawmakers need to raise the nation’s $16.4 trillion debt ceiling next month, and they will also have to deal with the $110 billion in automatic spending cuts and an expiring short-term measure that funds government agencies in March.

High-income Economies…US consumer confidence fell for the second month in a row in December, with the Thomson Reuters/University of Michigan consumer confidence index declining to 71.3 from 72.9 the previous month. More than a third of consumers referred to concerns related to fiscal cliff negotiations. The consumer expectations sub-index slipped to its lowest since November 2011.

UK retail sales fell 0.1% (m/m) in December, with sales only 0.3% (y/y) higher than a year earlier, underscoring the weakness of consumer spending as the economy continues to struggle after emerging from a double-dip recession in the third quarter of 2012.

Poland's industrial production plunged 14.2% (m/m) in December, the steepest fall in almost four years, with annual industrial output falling 10.6% (y/y). A part of the decline was due to fewer working days in December, but also reflects weak domestic demand and difficult economic conditions in key Euro Area export markets.

New industrial orders in Spain fell 1.5% (y/y) in November, reversing the 5.5% gain seen in October. While consumer goods orders fell 1.4% (y/y), orders of capital goods and energy products increased 4.7% and 7.5%.

Developing Economies…China's GDP growth was reported at 7.9% (y/y) in the fourth quarter of 2012 showing a strong rebound from 7.4% growth in the third quarter.

Quarterly GDP growth rates have been revised for the last three quarters of 2011 and the third quarter of 2012. The revised quarterly growth rates were reported at: 11Q1 - 2.2%, 11Q2 - 2.4%, 11Q3 - 2.3%, 11Q4 - 1.9%, 12Q1 - 1.5%, 12Q2 - 2.0%, 12Q3 - 2.1% and 12Q4 - 2.0% respectively compared with the earlier 11Q1 - 2.2%, 11Q2 - 2.5%, 11Q3 - 2.4%, 11Q4 - 1.7%, 12Q1 - 1.5%, 12Q2 - 2.0% and 12Q3 - 2.2%. The revised quarterly numbers suggest a deceleration in GDP growth to 8.2% in the fourth quarter of 2012 from 8.7% reported in the third quarter.

Annual GDP growth was reported at 7.8% in 2012, the weakest growth rate since 1999 and lower than 9.3% achieved in 2011.

Industrial production in China grew 10.3% (y/y) in December, accelerating from 10.1% rise in November. Retail sales expanded 15.2% (y/y) in December, faster than the 14.9% growth in November. China's urban fixed asset investment in the 12 months through December increased 20.6% (y/y). Monthly price increase for the newly built homes was registered in 54 of the 70 cities surveyed. On an annual basis, 40 cities reported increase in prices in December compared to 25 cities in November.

Chile's central bank kept its monetary policy rate steady at 5.0%. Inflation in Chile eased to 1.5% in December 2.1% in November remaining below the central bank’s 3.0% annual target.

Mexico's central bank left its benchmark interest rate unchanged at 4.50%, but indicated that it is considering monetary easing in light of weak growth and moderating inflation.

World Bank’s Global Economic Prospects, January 2013 featured in The Economist.

Prospects Daily: Euro Area services PMI rises; Brazil’s industrial production slows; Philippines’ 2012 inflation improved

Financial Markets…The Standard & Poor’s 500 Index added 0.1% in Friday morning trade and the dollar weakened 0.2% versus the euro after a U.S. Labor Department report showed a slightly slower than expected employment growth in December. The S&P500 has advanced 4.1% this week, gearing for its largest weekly gain in 13 months.

10-year U.S. Treasury yields rose 4 basis points to 1.95%, paring some losses after climbing to a nine-month high of 1.97% before a government report on U.S. employment. Treasuries extended losses yesterday as investors feared the possibility of U.S. Federal Reserve ending its $85 billion monthly bond purchase program sometime this year.

Developing-stock markets fell for the first time in 10 days, with the benchmark MSCI index sliding 0.6% from a 17-month high closing yesterday, after Fed policy makers said they may end their stimulus monetary policy. Emerging-market stocks jumped 108% during the first round of so-called quantitative easing, and they have advanced 9.5% since the U.S. Federal Reserve announced a third round on September 13.

High-income Economies…U.S. nonfarm payroll employment rose 155,000 in December, below the 161,000 increase in November, with a slower pace of increase in private sector employment and a drop in public sector employment. The unemployment rate held steady at 7.8% in December.

U.S. factory orders were flat in November, following a 0.8% (m/m) rise the previous month. However, nondefense capital goods order excluding aircrafts – a proxy for future business investment – rose a robust 2.6% (m/m) following a 3% rise the previous month. The ISM non-manufacturing index for the U.S. index rose to 56.1 in December (the highest reading since February) from 54.7 in November.

Euro Area consumer price inflation remained steady at 2.2% (y/y) in December according to preliminary estimates, the same rate as November, as a weakening pace of year-on-year increases in energy prices was offset by a slight pickup in food and services inflation. The overall inflation rate remains above the European Central Bank’s 2% target.

Markit’s services Purchasing Managers’ Index (PMI) for the Euro Area rose to 47.8 in December from 46.7 in November, suggesting a slower pace of contraction in services sectors (An index level below 50 indicates contraction). Despite an earlier reported modest decline in the manufacturing PMI (to 46.1 from 46.2), a composite index that includes both manufacturing and services rose to 47.2 from 46.5 in November.

Services PMI for Germany rose above the 50-mark to 52.0 in December from 49.7 in November. PMIs rose in Italy (to 45.6 from 44.6) and Spain (to 44.3 from 42.4), but fell in France (to 45.2 from 45.8). Services PMI for Ireland fell to 55.8 from 56.1, but indicating a still robust pace of expansion.

German retail sales rose 1.2% (m/m) in November, almost reversing a 1.3% drop the previous month. Retail sales were 0.9% lower than a year earlier in November.

Developing Economies…China’s HSBC business activity index for service sector declined to 51.7 in December from 52.1 in November suggesting a continued, but somewhat weaker expansion of service sector activity in December compared to November. An earlier survey by China Federation of Logistics and Purchasing (CFLP) and the National Bureau of Statistics suggested that that China's service sector growth accelerated to a four-month high in December.

Residential property prices in China increased for the first time in nine months in December, though at a marginal rate, indicating that the property market is on a recovery path. The house price index, which measures the average cost of a new home in 100 major cities, moved up 0.03% on an annual basis in December, ending eight months of declines.

Inflation in the Philippines edged up to 2.9% in December from 2.8% in November, mainly on the account of higher inflation for food, beverages and tobacco. The annual average inflation rate in 2012 at 3.1% was the lowest registered over the past five years. Inflation in 2012 was also significantly lower than 4.7% attained in 2011.

Brazil's industrial production decreased 1% (y/y) in November following a 2.5% growth in October, pulled down by decrease in production of capital goods. On a monthly basis, industrial production also fell by 0.6% in November.

Meanwhile, Brazil’s Markit Economics activity index for services sector, which increased to 53.5 in December from 52.5 in November, suggests that service sector expanded at the fastest rate in nine months in December.

Prospects Daily: Global equities decline after US budget talks stall and US consumer confidence falls

The Prospects Daily will be on Winter recess and will resume on

Wednesday January 2nd, 2013.

Financial Markets…Global equities declined and US Treasuries gained after the Congress failed to agree on a plan to allow higher taxes on those earning more than $1 million as budget talks stalled. The MSCI All-Country World Index dropped 0.8% at 10:44 a.m. in New York and the Standard Poor’s 500 Index slumped 0.9%. The Stoxx Europe 600 Index slid 0.4%, falling from a 19-month high. US Treasuries rose, with the yield on 10-year Treasuries decreasing five basis points to 1.75 percent.

The MSCI Emerging Market Index slid 1.1%, its biggest drop in more than five weeks. China’s stocks retreated from a four-month high on concern that the rally from the beginning of this month was excessive. The Shanghai Composite Index fell 0.7%. India’s Sensex slid 1.1%.

High-income Economies…US durable goods orders rose 0.7% (m/m) in November, following an upwardly revised 1.1% gain in October. Orders for capital goods excluding defense and aircraft – a proxy for future business investment – rose 2.7% (m/m) building on an upwardly revised 3.2% gain in October.

US consumer sentiment, however, slumped in December, with the Thomson Reuters/University of Michigan consumer sentiment index falling sharply to 72.9 from 82.7 in November, reflecting consumers’ concerns about uncertainty over negotiations on tax hikes and spending cuts that are set to come into effect in the new year.

UK GDP growth for the third quarter was revised slightly down to 0.9% (q/q) (implying an annualized rate of 3.6% q/q) from the earlier reported 1.0%. Despite the downward revision, this was the UK economy's best performance since the second quarter of 2010.

Denmark’s GDP grew at an annualized 1.2% (q/q) in the third quarter, following a 2.8% annualized decline in the second quarter.

Canada’s consumer price fell to the lowest in three years in November, declining to 0.8% (y/y) compared with 1.2% in October. On a monthly basis, prices fell 0.2% due to declines in fuel costs and automobile prices. Inflation is now below the central bank’s 1%-3% target range.

Poland’s retail sales growth slowed to 2.4% (y/y) in November from 3.3% in October, falling 6.4% (m/m), pointing to a slowing consumer demand amid high unemployment. Poland's unemployment rate rose to 12.9% in November from 12.5% in October.

Developing Economies…Argentina's industrial production dropped 1.4% (y/y) in November and declined 2.1% (m/m) versus October, due to slowing down of Brazilian demand for Argentine automobiles as well as decline in investment and domestic demand.

Brazil's unemployment rate dropped to 4.9% in November from 5.3% in October. November figure was the lowest since December 2011, when the jobless rate was 4.7%.

Colombia’s GDP growth slowed to 2.1% (y/y) in the third quarter from 4.9% in the second quarter, to a large extent due to a 12.3% drop in construction. On a quarterly basis Colombian economy contracted 0.7% (q/q) in the third quarter. The Government of Colombia lowered economic growth forecast for full-year 2012 to 4-4.5%, due to weak expansion in the third quarter, from a previous targeted 4.8%.

Prospects Weekly: Flows into the bond and equity funds of developing countries rallied in the second half of this year

Flows into the bond and equity funds of developing countries rallied in the second half of this year amid stabilization of financial markets and quantitative easing in high income countries. Following a weak second quarter due to financial market tumult, growth has picked up in the developing world, notably in China – although output growth slowed in India and South Africa due to country-specific factors. The strengthening of developing-country activity (and imports) has been reflected in a modest improvement in high income country growth, but the continuing weakness in the Euro Area, fiscal uncertainties in the United States, and weak Japanese sales to China have limited the overall improvement.
Foreign portfolio flows to developing countries rallied in the second half of 2012. Capital flows into emerging market bond and equity funds have picked up since July, in line with the general improvement in global financial conditions. After $9.6 billion exited equity funds in May/June, some $10 billion flowed in during September-November. Overall, net inflows for 2012 through end November reached $22 billion. This is a marked improvement from $41.2 billion outflow during the first 11 months of 2011, but only a third of the inflows in 2010. In comparison, flows to emerging-market fixed-income (bond) funds were relatively stable in the May/June period. Inflows into bond funds have totaled $61.6 billion in the year to date, more than twice the $25.7 billion in 2011 and surpassing the $60.2 billion received during the same period in 2010.
GDP growth for developing countries as a whole picked up in the third quarter, but weakened in a few due to country-specific factors. Partly as a result of stimulus measures and bolstered by improving US growth (see below), GDP growth in China picked up to a 9.1% annualized rate in the third quarter, up from 8.2% in Q2 and 6.1% in Q1. Russia’s growth also picked up to 2.3% in Q3, supported by a rise in crude oil prices (itself reflecting the strengthening of global activity). The pace of expansion in Brazil also improved, but remained modest at 1.3% (versus 0.8% in Q2). In contrast, mining tensions caused South Africa’s growth to slow from 3.4% in Q2 to 1.2% in Q3. In India, annualized GDP growth slowed from 5.8% to 3.8% as a result of delayed monsoon rains and weak industrial activity. In other developing countries, output growth accelerated from 3.7% in Q2 to 4.3% in Q3. Overall, GDP growth in developing countries remains 4 percentage points higher than in high income countries.
Following several quarters of deceleration, growth in high income countries has also started to improve, partly in response to an increase in developing country imports. Reflecting both weak Euro Area domestic demand and accelerating developing country imports, rising net exports moderated the annualized pace of GDP decline in the Euro Area from –0.7% in the second quarter to –0.2% in the third quarter. In the US, GDP growth strengthened to 2.7% in Q3, from 1.3% in Q2, as the housing sector started to rebound after years of consolidation. The recovery would have been stronger had uncertainty over fiscal policy not contributed to a decline in investment spending. In Japan, an end to earlier stimulus measures plus weak demand from China (in part due to island-related disputes) led to a 3.5% contraction in Q3 GDP. In other high income countries GDP growth picked up modestly to 1.5% in Q3 from 0.4% in Q2.

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Prospects Daily: US consumer confidence falls; inflation moderated in Chile, Peru and Mexico but rose slightly in Brazil


Financial Markets…U.S. Treasuries slid for the first time in four days, with the benchmark note yields 3 basis points to 1.62%, as a government report showed U.S. employers added more than forecasted jobs in November. U.S government bonds have advanced 2.8% this year as of yesterday, after gaining 9.8% in 2011 and 5.9% in 2010.

The Eonia swap rate (an estimate of compounded overnight borrowing costs in euros over the next three months) fell to 4.5 basis points on Friday, the lowest level since July, as investors speculated the European Central Bank is open to cut interest rates further. And the 3-month euro interbank offered rate (or Euribor), bank-to-bank lending rate, fell at a record low of 0.187%.

The dollar strengthened against the yen and euro following encouraging U.S. jobs data, climbing 0.3% to 82.66 yen and 0.4% to $1.2913, respectively. Meanwhile, Canadian dollar rallied versus its U.S. counterpart, climbing 0.3% to 98.82 cents per U.S. dollar, as the country’s unemployment rate fell to 7.2% from 7.4% last month.

High-income Economies…U.S. nonfarm payroll employment rose by 146,000 in November, suggesting that the impact of Hurricane Sandy on overall U.S. employment had been limited. But the rate remains well below the 200,000-250,000 monthly gains needed for a sustained improvement in the labor market as employers remain reluctant to hire amid U.S. “fiscal cliff” risks. The unemployment rate, however, edged down by 0.2 percentage points to a four-year low of 7.7%, mostly because of people dropping out of the labor force.

Reflecting uncertainties relating to impending tax increases and spending cuts, the outlook of U.S. consumers deteriorated sharply in December, with the Thomson Reuters/University of Michigan consumer sentiment index falling to 74.5 in December, the lowest since August, from 82.7 in November.

German industrial production fell 2.6% (m/m) in October, a faster pace of decline compared with a 1.3% drop in September, suggesting that the Euro Area debt crisis is taking a toll on Europe’s largest economy. Earlier data had shown that industrial orders were supported by strengthening foreign demand (partly from developing countries), but domestic demand has continued to weaken.

U.K. industrial production fell 0.8% (m/m) in October, a slower pace of decline than the 2.1% monthly fall in September. On a year-on-year basis, industrial output was 3% (y/y) lower in October, compared with -3.2% (y/y) in September.

Revised data showed that Greek GDP shrank a slightly smaller 6.9% (y/y) in the third quarter, compared with a 7.2% decline reported earlier.

The pace of economic contraction in Czech Republic accelerated in the third quarter to an annualized pace of about 1.2% (q/q) from 0.8% recorded in the second quarter. On a year-on-year basis, Czech Republic’s GDP contracted by 1.3% (y/y) in the third quarter of 2012, compared with 1% (y/y) decline in the second quarter.

Hungary’s GDP continued to contract in the third quarter at an annualized pace of about 0.8% (q/q). On a year-on-year basis, Hungary’s GDP contracted by 1.5% (y/y) in the third quarter of 2012, compared with 1.2% (y/y) declined in the second quarter.

Developing Economies…The Central Bank of Egypt held its benchmark overnight deposit rate steady at 9.25%. Headline inflation rose to 6.7% in October from 6.22% in September on a sharp rise in the prices of butane gas cylinders, partly due to bottlenecks in distribution channels, despite moderating food prices.

Brazil’s inflation accelerated insignificantly in November to 5.53% (y/y) from 5.45% in October with the prices of all key components in consumer basket showing insignificant rise.

Chile’s inflation moderated to 2.1% (y/y) in November from 2.9% in October.

Mexico’s inflation moderated to 4.18% in November from 4.6% in October on easing of food prices following a temporary spike related to adverse weather and the outbreak of avian flu in western Mexico.

Peru's central bank held its policy rate unchanged at 4.25%. Peru's inflation rate slowed to 2.66% in November under the central bank’s 3% inflation target from 3.25% in October on moderating food prices.

Malaysia's exports fell 3.2% (y/y) in October from 2.6% increase in September  on continued weak demand from major trade partners and moderating prices for Malaysia's commodity exports (palm oil and crude rubber).

Prospects Daily: Australia and Uganda cut policy rate, Brazil’s industrial production accelerates

Financial Markets… The euro rose to a six-week high against the dollar, appreciating to $1.3077, and Europe’s benchmark stock index (Stoxx Europe 600) gained for a second day, as growing optimism over a successful Greek buyback program boosted investor sentiment. Greece started the €10 billion ($13 billion) repurchase of government bonds maturing between 2023 and 2042 on Monday.

Italian and Spanish bonds advanced on Tuesday, with their 10-year yield dropping 4 basis points to 4.41% and 2 bps to 5.22%, respectively, as Greek optimism boosted demand for high-yielding region’s government debt into year-end. Meanwhile, Greek bonds turned slightly lower after Monday’s surge with results of the debt buyback due on December 7.

Gold for February settlement fell 0.9% to $1,705 an ounce on Tuesday, after falling a four-week low of $1,698.50 earlier, as concern over U.S. economy amid stalled budget talks weighed negatively on commodity prices. Copper for delivery in three months also dropped as much as 0.5% to $7,963.50 a metric ton, after reaching a six-week high of $8,045 yesterday.

High-income Economies…The Reserve Bank of Australia cut its benchmark interest rate by a quarter percentage point to 3%, the lowest in three years. The sixth rate cut in the past 14 months reflects Australia’s contained wage pressure, lower projected mining spending, and an unemployment rate at a 2½-year high—as well as concerns that the Australian dollar remains “higher than might have been expected” given lower export prices and a weaker global outlook, according to the central bank.

Producer prices in the Euro Area rose 0.1% (m/m) in October from the previous month, but producer price inflation edged down to 2.6% (y/y) in October from 2.7% in September due to base effects. A deceleration in energy-cost growth to 5.9% (y/y) in October from 6.9% in September was offset by acceleration in price increases for intermediate and non-durable consumer goods, partly reflecting strengthening demand.

Canada’s central bank kept its benchmark overnight rate at 1%. In explaining its decision, the central bank said that although economic activity in the third quarter was weak, global economic conditions remain stimulative (though vulnerable to major shocks from the U.S. or Europe) and the pace of Canada’s economic growth is expected to pick up through 2013, while inflation is expected to increase and reach the targeted 2 percent rate over the course of the next 12 months.

The number of people registering for unemployment benefits in Spain rose for the fourth month in November, rising by 74,296 from October to reach 4.91 million, as some firms used newly introduced labor rules to reduce the size of their workforce.

Developing Economies…Brazil’s industrial production increased by 2.3% (y/y) in October compared to a one percent decline in September. On a monthly basis, industrial production rose by 0.9% in October reversing a one percent decline in September.

China and South Korea agreed to use proceeds of existing currency swap deals to settle bilateral trade between two countries.

Malawi continues to be an outlier from the global policy easing cycle, as it continues to tighten monetary policy to achieve macroeconomic stability, raising the policy rate by 400 basis points to 25.0%. Foreign exchange reserves have been falling since July, to an alarming level equivalent to 0.8 months of import cover as of end-October. Inflation rate rose to 30.6% (y/y) in October, up from 28.3% in September, with food price increases accounting for the bulk of the increase in inflation.

Uganda's central bank cut its Central Bank Rate (CBR) by 50 basis points to 12.0% as subdued inflationary pressure allows the bank to stimulate economic growth. November headline inflation rose to 4.9% from 4.5% in October, but remains within the central bank’s 5% medium-term inflation target.

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: Private capital flows to developing countries eased in October

Private capital flows to developing countries eased in October, but remain close to their highest level in more than a year, led by robust bond issuance by emerging market sovereigns and firms. Business sentiment has strengthened in some countries, including the US and several emerging markets, but remains weak in general amid US “fiscal cliff” and Euro Area risks. In the US, new discoveries and innovations have pushed down domestic prices of natural gas, creating arbitrage opportunities between domestic and international markets.
Private capital flows to developing countries remain high, despite easing in October. Gross international capital flows to developing countries equaled $49 billion in October, the second highest inflow over the past 15 months, but down from the record $71bn of inflows during September. Euro Area debt turmoil in May caused capital flows to slow, but stabilization of financial market tensions and high-income monetary policy prompted the recent uptick in flows. Bond issuance was particularly strong at $32 billion in October, with 44% of the total destined for the financial sector. Notable issues included a $2 billion bond sale by Russia’s Sberbank, a $1.5 billion offering of 10-year sovereign bonds by Chile, and a $500 million sale by Bolivia (its first in nearly a century). New equity issuance and bank lending (especially to Emerging Europe and Latin America) moderated, partly because low bond yields made bonds a more attractive option for some borrowers.

 
Business sentiment indicators have strengthened in several countries, but remain weak in general amid risks to the global economy. Manufacturing Purchasing Managers’ Indexes (PMIs) for October suggest a strengthening of activity in the US as labor and housing markets continue to improve. PMIs also gained ground and suggest expansion in Brazil, Indonesia, India, Russia, and Turkey. In China, however, both the official and Markit PMI are below or close to the no-growth 50 threshold despite recent accelerations in industrial activity. Similarly, the manufacturing PMI for both core and periphery Euro Area countries points strongly toward further contraction, despite a stabilization and even small gains in industrial activity during recent months. Business pessimism may be reflecting market worries that the U.S. fiscal cliff or Euro Area tensions could flare up dampening demand and prospects—a view seemingly supported by weak sales of capital goods.

 
The wide gap between U.S. natural gas prices and European natural gas and crude oil prices suggests downside risks on oil prices. The post-2005 increase in crude oil prices induced innovation in both natural gas and oil extraction technologies such as horizontal drilling and hydraulic fracturing. A 28 percent increase in U.S. natural gas production between 2005 and 2011 has depressed domestic prices. Low prices have induced electrical and petro-chemical producers to substitute natural gas for coal, but a similar shift by the transportation industry has yet to take place, in part due to the absence of distribution networks and safety concerns. So far, export licensing requirements have prevented U.S. producers from selling into world markets where natural gas prices are much higher. U.S. natural gas costs only 29 and 20 percent as much as European and Japanese gas. Should licenses become more readily available, the arrival of US gas on international markets could exert significant downward pressures on international prices of both natural gas and crude oil.

 

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Prospects Daily: Year-to-date global corporate bond sales rose to $3.43 trillion

Financial Markets…Year-to-date global corporate bond sales rose to $3.43 trillion, already surpassing 2011’s full year total of $3.29 trillion, as further stimulus from global central banks pushed yields to record lows. Funding costs for the riskiest to the most creditworthy corporates are plunging as the persistent low-yield environment spurred unprecedented investor demand.

Perceived default risk of US corporate debt climbed for a third consecutive day, with the benchmark Markit CDX North America Investment Grade Index rising 3.6 basis points to 108 bps, amid growing concerns that the so-called US fiscal cliff could push the world largest economy into deep recession.

Ghana’s 3-month borrowing costs, which fell to a five month low last week, are gearing for further decline today after the central bank issued record volume of domestic bonds, lowering its financing needs in near-terms. The 3-month yield on Ghana’s Treasury bills dropped 69 bps to 22.33% last week, but they are still the highest among African countries.

In its November update released earlier today, the US Department of Agriculture reported marginal increases in global grain supplies (compared to the October update) for the 2012/13 crop year ending in May 2013. Yet, stock-to-use ratio for corn—and less so for wheat—remain at historical low levels. The rice market is well-supplied with trade expected to surpass 38 million tons in 2012—a record high.

High-income Economies…France's industrial production posted the biggest monthly drop since December 2009, falling 2.7% (m/m) in September (-2.1% y/y), with both manufacturing production and construction contracting. The Bank of France said the economy may shrink in the fourth quarter.

Italy’s industrial production fell by 1.5% (m/m) in September (-4.8% y/y), the most in five months, suggesting the country remained in recession in the third quarter.

Greece’s industrial production fell 7.3% (y/y) in September, resuming its downward trend after rising temporarily by 2.5% in August.

Sweden’s industrial production fell 5% (y/y) in September, following a 2.7% increase the previous month.

Germany’s annual consumer price inflation on a EU-harmonized basis remained at 2.1% (y/y) in October, the same rate as September (+0.1% m/m). A 5.5% (y/y) increase in domestic gas and diesel prices and increases in some food items prevented inflation from falling.

UK’s goods trade deficit fell to 8.4bn pounds in September from 10bn pounds in August, as exports rose 1.1% (m/m), while imports fell a larger 3.9% (m/m) because of lower imports of fuel and manufactured goods.

US consumer confidence continued to improve for the fourth month in November, with the Thomson Reuters/University of Michigan consumer sentiment index climbing to 84.9 (a five-year high) from 82.6 in October as the labor market showed signs of improvement.

Hungary’s industrial output rose 0.6% (m/m) in September, following 1.8% increase in August. Despite the monthly increases, industrial output in September was 3.8% lower than the same month the previous year.

Developing Economies…China’s retail sales rose 14.5% (y/y) in October slightly faster than 14.2% in September, while consumer price inflation dropped to its weakest level in nearly three years to 1.7% (y/y) in October from 1.9% in September on declining food inflation.

Growth in China's industrial production accelerated to 9.6% (y/y) in October from 9.2% in September China’s producer prices fell at a slower pace of 2.8% (y/y) in October compared to a 3.6% fall in September. China's total fixed asset investments were 20.7% higher during the January-October period compared to the same period last year.

Malaysia's exports grew 2.6% (y/y) in September, recovering from a 4.5% contraction in August on strong demand from ASEAN, the US, India and Taiwan, while exports to the European Union decreased 12.5%. Import growth accelerated to 9.6% (y/y) in September from 2.8% in August.

The central bank of Peru held its benchmark interest steady at 4.25%. Peru's inflation rate fell to 3.25% (y/y) in October from 3.74% in September, but remains above the central bank's targets inflation of 2.0% (+/- 1). An acceleration of inflation in September was related to a weather conditions-related temporary supply side factor.

Russia's central bank held its benchmark refinancing rate steady in October. Inflation declined in October slightly to 6.5% (y/y) from 6.6% in September, but remains above the Bank of Russia's target of 5-6 percent inflation range. The bank noted that inflation is stabilizing due to a moderation in food prices which had experienced a temporary upswing related to a supply shock associated with a bad harvest.

Prospects Daily: US treasuries gained and the benchmark 10-year bond yield edged down

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.

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