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Prospects Weekly: Weak developing country demand weighs down on global trade growth

Global Macroeconomics Team's picture
Global trade volumes contracted in July. While slowly improving domestic demand conditions helped stabilise high-income country imports, developing-country import demand was mixed, with several large developing economies experiencing a sharp contraction. Following a precipitous decline in gross capital flows to developing countries in June, triggered by concerns of QE tapering, gross capital flows to developing countries showed signs of recovering in July. With the exception of Portugal, where spreads have risen in recent weeks, yields on sovereign bonds of most high-spread Euro Area economies have been trading within a narrow band.
Weak developing country demand weighs down on global trade growth. Global trade volumes contracted at an annualized pace of 2.0 percent in the three months to July - the first such contraction in nine months. While import growth remained somewhat stable in high-income countries (0.1 percent) in July, held-up by slowly improving domestic demand, much of the weakness in global trade sprung from contracting developing country imports (-7.0 percent). Performance across developing countries varied, with weaker import demand in India (reflecting weaker domestic demand conditions), China (the weaker numbers are in part due to efforts to clamp down on over-invoicing), Russia and South Africa. Consistent with the recent strengthening of economic activity, import demand accelerated in Turkey and Brazil. The general weakness in developing country trade is likely to persist through Q3 2013 as available new export order indicators for August show contracting orders for Brazil, China, India, Indonesia and Russia. In contrast, export orders in Turkey increased.
Gross capital flows to developing countries partially recover in July. Following a sharp 50% decline in gross capital flows to developing countries in June, precipitated by concerns of possible easing of United States monetary policy, gross capital flows to developing countries rebounded by 25% in July. Nonetheless the $44.2 billion gross capital inflows in July still remains well below the year-to-date average of $57.6 billion, as QE tapering concerns continue to linger. Indeed, much of the increase in capital inflows to developing countries in July was due to a strong recovery in bond issuances (rising from $2.8 billion in June to $32.2 billion in July). Both equity issuances and bank lending further declined in July.
Borrowing costs for high spread Euro Area economies have in general stayed down. Notwithstanding recent perturbations to financial markets triggered by QE tapering concerns, yields on sovereign debts of high-spread Euro Area economies have been sustained at levels close to their two-year lows. Since June, yields on ten-year government bonds have fluctuated within a narrow band of 80 basis points (bps). Portugal, however remains the exception, with yields rising by 187 bps on account of recent political strains. An expected continuation of the European Central Bank’s lax monetary policy, ongoing progress in banking sector restructuring, and a gradually improving economic situation (GDP expanded in Q2 after six quarters of contraction) should boost business confidence (business sentiment reached a two year high in August). All of these factors will help reduce uncertainty and be supportive of lower borrowing costs through Q3 2013.


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