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Prospects Weekly: Data releases suggests that capital good orders appear to be holding firm

Global Macroeconomics Team's picture
Recent data releases suggests  that capital good orders from developing countries  appear to be holding firm, despite heightened  uncertainty in the global economy. Sovereign bond spreads for emerging markets have narrowed recently, amid bolder attempts to address the eurozone debt crisis. While the decline in spreads is welcome, their sensitivity to events in Europe is worrisome. Recent data revisions point to higher grain stocks than previously estimated, nevertheless stocks remain low.
Capital good orders from developing countries appear to be holding up. The US, Germany and Japan are the leading exporters of capital goods. August data suggest that inspite of ongoing perturbations in high income economies, capital good orders from developing countries have not let up, thereby boding well for their long-term growth prospects. US orders of non-defense capital goods were up 5%, and for the first time since the Tohoku quake, foreign demand for Japanese machinery rose, soaring by 32% - with strong demand from China, South Korea and Thailand; and in Germany where volatility in orders are higher, foreign orders were up 0.4%. The emerging picture of capital good orders from developing countries is consistent with latest surveys, showing that outside Europe, business confidence in a number of developing countries remain steady.


Signs of contagion from debt crisis to developing countries continue. After remaining around 310 bps range since late-2009, developing country composite spreads (EMBIG) widened by 181 bps between July and September amid increased uncertainty related to the resolution of the European debt crisis, with half of the deterioration in spreads occurring in the second half of September. Most recently, spreads have narrowed again (down 78 bps between Oct. 4 and Oct. 12) along with signs that EU policy action to address banking-sector vulnerabilities will be forthcoming. While these declines are welcome, they reinforce the view that developing country risk assessments are now being lumped together with those of high-income Europe, making them vulnerable to sentiments in Europe.


The 2011/12 global grain balance appears to be healthier than previously estimated. In its October 12 update, the US Department of Agriculture revised upwards its end-of-season stocks of wheat, maize and rice (4.0%, 9.6%, and 2.7%, respectively) from a  month earlier. Production was revised upwards as well. The Oct 12 revision came after a 23% increase in estimates of US stocks in hand. Despite the upward revision, maize stocks are expected to be 5% lower than their 2010/11 level. From a longer term perspective, stock-to-use ratio are lower than their 15-year average by 40% for maize, 15% for wheat and 3% for rice.


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