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Prospects Weekly: The temporary resolution of the US debt ceiling standoff briefly supported market confidence, Rapid credit growth observed in some developing countries in recent years, Base metal prices recovered in the third quarter

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The temporary resolution of the US debt ceiling standoff briefly supported market confidence, but the respite could be short-lived as political uncertainty persists in the run-up to new US fiscal deadlines in coming months. Rapid credit growth observed in some developing countries in recent years implies growing banking sector exposure to rising interest rates. Base metal prices recovered in the third quarter, but price risks are weighted on the downside reflecting abundant supply and a deceleration of growth in China.
The US Congress agreed to temporarily raise the debt ceiling until February 7 and to re-open government until 15 January. This prompted US stock markets to rise by 1.4 percent on the news and US Treasury Yields maturing in the next few weeks to normalize, as the immediate threat of default disappeared. But yields on bonds maturing early next year (3 and 6 months T-bills) are still twice higher than a month ago, reflecting expectations that renewed political acrimony and default risks will persist in the run-up to the February deadline. While fiscal tensions increase the likelihood of further delays in Fed tapering plans, continued market volatility might have negative implications for developing countries’ financing conditions in the months ahead. Political deadlocks and repeated “near miss” crisis could also have lasting consequences for global risk premia and currency developments, as foreign investors - holding nearly half of the total outstanding debt of the US – reassess their exposure to US Treasuries and diversify foreign exchange reserves.
Developing countries that have seen rapid increases in domestic credit in recent years could be particularly exposed to tighter financing conditions. Outstanding credit exceeds 100 percent of GDP in 15 developing economies, and grew significantly faster than GDP (by more than 15pp) in about 40 developing economies between 2007 and 2012. The sharpest upsurge was recorded in Thailand, Armenia, China, Malaysia, Morocco and Turkey. Robust real credit growth was still observed in the course of 2012 and 2013 in Cambodia, Argentina, Armenia, Indonesia and Paraguay. Monetary, fiscal and regulatory tightening in several countries, including China, Brazil, India, and Indonesia, will help contain a further build-up of credit risks but banks’ exposure to rising interest rates and declining credit quality needs close monitoring.
Base metal prices recovered in the third quarter following sharp falls in the first half of the year, but risks remain on the downside. Prices are up by nearly 6 percent since end-June, after falling by 11 percent in the first half of the year, helped by improving global manufacturing activity and a rebound in imports by China after a prolonged period of destocking. Improving demand has been reflected in declining metal inventories, which are down 25 and 5 percent for copper and aluminimum respectively compared to their June peaks. However, price risks are on the downside, reflecting abundant mining supply coming onstream, elevated inventory holdings and a deceleration of growth in China.

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