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Prospects Weekly: Business sentiment continued to improve in the Euro Area, Grain prices have been declining steadily since last summer’s spike, High-frequency data indicate a 5 percent (y/y) rise

Business sentiment continued to improve in the Euro Area and Japan in June, but stabilized at relatively weak levels in developing countries, suggesting continued weakness in developing-country real side economic activity. Grain prices have been declining steadily since last summer’s spike, as supply expectations for the 2013/14 season have markedly improved. High-frequency data indicate a 5 percent (y/y) rise in foreign direct investment inflows to developing regions during the first quarter of 2013, with variation across emerging economies.
 
Business sentiment continued to improve in the Euro Area and Japan in June, but stabilized at relatively weak levels in developing countries. The manufacturing Purchasing Managers’ Index (PMI) for the Euro Area rose to 48.7 in June, with marked improvements in France, Italy and Spain, pointing to an easing of the economic downturn. But in Germany, business sentiment fell due to the weakness in new orders, with a sharp decline in export orders. Manufacturing PMI in Japan has risen strongly, supported by aggressive monetary easing. US PMI inched down, but signals continued expansion. Among developing countries, business sentiment stabilized at relatively weak levels of the previous month, with PMIs at close to the 50-mark in Brazil, China, and India. Business sentiment in Russia however improved, buoyed by domestic orders. Subdued developing-country business sentiment suggests that weakness in real side activity extended well into the second quarter.
Grain prices have been declining steadily since last summer’s spike, as supply expectations have improved. Maize and wheat prices have fallen about 10 percent each since July 2012 as expectations for the new season have markedly improved. In its July 11, 2013 grain update, the US Department of Agriculture expects maize production to reach 960 million tons in 2013/14, 12.3 percent higher than the current season’s crop. Consequently, the stock-to-use ratio (S/U) is expected to reach 16.2 percent in 2013/14, up from the current season’s 14.3 percent. Wheat supplies are expected to improve as well, up 6 percent from 2012/13. But, due to an expected consumption surge, the S/U ratio will decline to 24.6 percent (down from June’s 26.1% estimate). The rice market is well supplied with production estimated at almost 480 million tons, and S/U ratio 22.7 percent, similar to historical norms.
High-frequency data indicate a 5 percent (y/y) rise in foreign direct investment inflows to developing regions during Q1 2013, but country-level data are mixed. FDI inflows eased in most Asian economies, including Malaysia, Thailand, and China, as GDP growth slowed. By contrast, inflows to Chile, India, and Russia were robust, mainly due to country-specific factors. Strong FDI inflows to Russia reflect the closing of a special acquisition deal, while FDI inflows to India almost doubled following an easing of restrictions last year. After declining 5 percent in 2012, FDI inflows to developing countries are expected to rise by 5-7 percent in 2013, with increases in all regions except East Asia and Pacific (mainly because of an easing in FDI inflows to China due to structural adjustments in its economy) and the Middle East and North Africa region (due to the political uncertainty).

 

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