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Prospects Daily: Japan’s GDP contraction slowed in Q4 while Euro Zone’s GDP contraction in Q4 accelerated and deepened, India’s wholesale price inflation eased, Romania narrowly avoided recession in Q4

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Financial Markets…European stocks (Stoxx 600 Index) retreated 0.4% and the euro weakened 0.9% to a three-week low of 1.3324 against the dollar reacting to data release on the Euro Zone economic outcome for the fourth quarter. German bunds advanced as Europe’s deepening recession stimulated demand for traditional safe-haven assets.

Emerging Europe’s shares declined the most in more than 3 months, with the benchmark MSCI index sliding 1.4% in afternoon trading, after data showed the economies of the Euro Area and Hungary shrank further in the fourth quarter. Meanwhile, overall developing-country stocks remain steady as earlier gains in Asia offset declines in Europe.

Romania plans to sell its first dollar-denominated bonds this year as the country seeks to finance its widening budget deficit and refinance maturing debt at lower yields. The government is looking to raise between $500 million and $1.5 billion with a maturity of at least 10 years. Romania sold 10-year dollar bonds in February 2012, raising $750 million at a yield of 6.45%. The new bond is expected to be priced at a yield of 4.625%. 

High-income Economies
…The pace of Japan’s GDP contraction slowed to 0.4% annualized rate (q/q, saar) in the fourth quarter of 2012 from a revised 3.8% in the third quarter. Japan’s central bank meanwhile decided to keep its benchmark overnight call rate at 0-0.1%, but confirmed its objective toward attaining a revised 2% inflation target by implementing aggressive monetary easing. Japan's consumer price index dropped by 0.1% (y/y) in December in its seventh consecutive monthly decline, but the easing in prices was milder than the 0.2% drop recorded in November.

The Euro Zone’s GDP contraction continued for the third consecutive quarter with the pace of contraction accelerating to 2.4% annualized pace (q/q, saar) in the fourth quarter from 0.4% in the third quarter. This was the fastest rate of contraction since the first quarter of 2009. It reflected the fact that both Germany’s and France’s outputs contracted in the fourth quarter (by 0.6 and 0.3 q/q respectively) following an expansion in the third quarter, and that the pace of output contraction has accelerated in both Italy and Spain (0.9 and 0.7 q/q respectively) in the fourth quarter. On an annual basis, the decline in Euro Zone GDP deepened to 0.9% (y/y) in the fourth quarter from 0.6% in the third quarter.

Developing EconomiesEurope and Central Asia: Bulgaria’s economy expanded for the tenth consecutive quarter in annual terms, with GDP rising by 0.5% (y/y) in the fourth quarter, the same as in Q3. In quarterly terms, output rose by a seasonally adjusted 0.1% (q/q), also the same as in Q3, as rising domestic demand offset a drop in exports to Europe. Consumer price inflation rose to 4.4 (y/y) in January from 4.2% in December led by higher heating, electricity and transport costs. Separately, unemployment climbed to 12.4% in Q4, from 11.5% in the third quarter.

GDP growth expanded by 0.1% (y/y) in the fourth quarter after declining by 0.5% in the third quarter. In seasonally adjusted quarter-on-quarter terms output rose by 0.2% (q/q) after contracting by 0.4% in the previous quarter, narrowly avoiding recession. Overall growth expanded by 0.2% last year compared with a 2.2% outturn in 2011, because of poor harvests and slowing export growth amid Europe’s economic slump.

Middle East and North Africa:
Iran’s unemployment rose to 11.2% in autumn 2012, up slightly from 11.1% in spring. Iran’s economy has struggled under the weight of economic sanctions in recent years.

South Asia:
India’s wholesale price inflation – the main inflation gauge – eased to a 32-month low of 6.62% (y/y) in January, from 7.18% in December led by a slowing in fuel and manufacturing goods inflation. Significantly food price inflation continued to accelerate.

Sri Lanka’s central bank kept its leading policy rates, the repurchase and reverse repurchase rates, unchanged at 7.5% and 9.5% respectively despite a recent acceleration in inflation. Headline inflation rose to 9.8%y/y in January from 9.2% in December.

Sub-Saharan Africa:
Ghana’s central bank left its benchmark interest rate unchanged at 15%. Inflation remained stable in January at 8.8% (y/y), the same as in the previous month and within the 9% (±2%) annual inflation target range, helped by stable fuel prices and transport costs.

Mozambique’s central bank left its key lending rate unchanged at 9.5% for the fourth month in a row. Inflationary pressures are modest with headline prices rising by 2.7% (y/y) in January, up from 2.0% in December.