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Prospects Daily: US dollar strengthens, Germany’s manufacturing business confidence improves, Malaysia’s GDP growth accelerates

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Financial Markets… Global stock markets tumbled on Thursday, with the MSCI Emerging Market index posting its biggest decline since July, extending losses spurred by growing concerns over the U.S. Federal Reserve’s future monetary policy. Declining commodity prices also weighted negatively on share prices. Notably, China’s benchmark Shanghai index slid 3%, the largest one-day decline since August 2011, extending the weekly loss to 4.4%.

The US dollar strengthened versus other major currencies, with the Dollar Index (which tracks the greenback against the currencies of six U.S. trading partners) rising to a 3-month high of 81.279 earlier, amid speculation that U.S. may curtail stimulus sooner than had been expected. The euro weakened 0.2% to $1.3265 against the dollar after sliding 0.8% yesterday.

U.S. and German government bonds advanced for a second day, with their benchmark 10-year yields sliding 3 basis points to 1.98% and 6 bps to 1.60%, as risk-aversion sentiment boosted demand for safe-haven assets. In Euro-zone, Dutch, Austrian and French government bonds also gained. 

High-income Economies
…Flash estimates of Purchasing Managers Indices (PMIs) for February for the Eurozone indicate weakening business sentiment, with the composite index dropping to a two-month low of 47.3 from a final reading of 48.6 in January led by a drop in the service sector PMI. The composite index has been below the 50 threshold separating contraction from growth for over a year and a half.

The flash reading for Germany’s manufacturing PMI rose to 50.1 in February from January’s final 49.8 reading. This is the first time the index crossed the 50 mark in 12 months. The composite PMI index eased slightly to 52.7 from 54.4 reflecting weakness in services.

France’s
manufacturing PMI improved slightly to 43.6 in February from 42.9 in January. However this remained the 19th consecutive month that the index has signaled contraction. Weakness in the service sector meanwhile dragged the composite index to a four year low of 42.3 in February from 43.7 in January.

Separately, in the Euro Area, European Council, European Parliament and Commission reached agreement on the so-called 'two-pack' process that, together with the so-called ‘Six Pack’ agreed in 2011, complete the set of rules for the EU’s stricter fiscal supervision and discipline. The agreement also envisages the creation of a group of high level experts to explore further steps towards integration, notably by revisiting proposals for a debt redemption fund and issuance of eurobills.

Consumer prices in the US remained flat in month-on-month terms for the second consecutive month in January, as a drop in energy prices offset rising core prices. In annual terms, headline inflation slowed to 1.6% (y/y) in January from 1.7% in December. Core prices, excluding food and energy rose by 0.3% (m/m), up from 0.1% in December, and by 1.9% (y/y) in both January and December.

Developing Economies
East Asia and Pacific: Malaysia’s GDP growth accelerated in Q4 2012 to seasonally adjusted 2.1% (q/q), up from 1.3% (q/q) in the previous quarter. The growth for the entire year came in at 5.6%, up 5.1% the year before and was driven by surging domestic demand.

Europe and Central Asia: Albania’s inflation in January accelerated modestly to 2.7% (y/y) in January from 2.4% (y/y) in December 2012. The main driver of annual inflation was the 4.4% (y/y) increase in food prices. Inflation is within the central bank's inflation target range of 2-4%.

Latin America and the Caribbean:
Mexico’s retail sales contracted in December by -1.8% (y/y) following growth of 3.5% (y/y) in November 2012.

Middle East and North Africa:
Morocco’s inflation was flat in January at 2.6% (y/y) as dropping food prices and increasing transportation and fuel costs offset each other.

South Asia:
India’s benchmark stock index (BSE S&P Sensex) suffered its biggest single day fall since May 2012 by plunging over 317 points or 1.53% to 19,325.36 - the lowest level since January - after Asian and European stocks plunged reacting to the minutes of US Fed's January meeting that were released late on Wednesday.

Sub-Saharan Africa
: Namibia’s central bank left its benchmark rate, the repo rate, unchanged at 5.5%. Central bank forecasts Namibia's GDP growth rate could slow to an estimated 4.4% in 2013, from 4.6% in 2012.