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Prospects Weekly: Business surveys point to further firming in global activity, Developing country goods trade deficits have narrowed substantially in the second half of the year, Business surveys point to further firming in global activity

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Business confidence surveys are indicating a further improvement in global activity, supported by strengthening demand in high income economies and China. This has translated into a rebound in exports of developing countries, and contributed to narrowing of their trade deficits. After a rebound in September, capital flows to developing countries weakened for a second consecutive month, reflecting concerns that the US Federal Reserve may begin to taper its quantitiative easing as the US economy strengthens.

Business surveys point to further firming in global activity. Following earlier softness in Q3, November manufacturing Purchasing Manager’s Indices (PMIs) signal accelerating output growth. Business confidence rebounded to its highest level in 2013 in the US as drags from the October government shutdown faded, and rose to a 50-month high in Japan. Euro Area PMIs indicated a fifth consecutive month of expansion, signaling the durability of the ongoing recovery. Sentiment also remained firm in China, suggesting that the recent policy-induced rebound in growth remains intact. In turn, stronger demand in high income economies and China is bolstering sentiment and activity elsewhere. Barring Brazil and Indonesia (where domestic demand has weakened), November PMIs point to improving business conditions in Mexico, Turkey, Hungary, South Africa and India in part supported by rising external orders. Going forward, the sustained pick-up in developing-country exports (14.9% 3m/3m annualized in October vs 1.7% in September) should help mitigate weaknesses in domestic demand.

Developing country goods trade deficits have narrowed substantially in the second half of the year. The aggregate merchandise trade deficit in developing countries (excluding China) more than halved in recent months in absolute terms, and as a share of GDP eased to 3.9 percent in Q3 from 5.4 percent in Q1. The improvement reflects a range of factors including rising demand for developing country exports from high income economies and China, as well as the effects of large currency depreciations during the summer in major middle-income economies. In addition, imports have turned strongly negative or slowed sharply in several middle-income economies, notably India, Indonesia, Turkey and Brazil, as monetary policy has been tightened and domestic demand has softened. Compared to other middle-income economies, India and Brazil’s trade balances have improved the most in recent months, although this is likely overstated in the case of India by a policy induced fall in gold imports (and accordingly may prove hard to sustain).

Capital flows to developing countries fell moderately in November. Following a sharp rebound in September, gross capital flows to developing countries have since faltered, precipitated by US monetary policy tapering concerns. Gross capital flows of $40.5 billion in November remain well below the January-May average of $53.6 billion and the year-to-date average of $46.5 billion. Nevertheless this year’s total flows are estimated to be 18% above the 2012 levels (bank and bond flows are up 24% and 20%, respectively) as both sovereign and corporate borrowers have been trying to lock in external financing before borrowing costs increase further. Equity issuance, however, is up only an estimated 2.4% from last year, in part reflecting China’s 13-month ban on new IPO activity.

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