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Prospects Weekly: China's growth remains robust in Q3-2010

China posted strongly positive real GDP growth in Q3-2010, fueled by a rapid expansion in domestic demand. The government has responded to signs of tightness, including a firming of inflationary pressures, by hiking policy rates—although real interest rates remain slightly negative. Reflecting the slowdown in industrial output mid-year, world oil consumption decelerated in Q3-2010. Nevertheless, oil prices have firmed since late-September, largely due to US-dollar weakness and investor search for yield. Based on latest available year-to-date data, FDI inflows to developing countries are expected to rise 17% in 2010 on a revival in M&A, supported by low funding costs. In contrast, FDI flows to high-income countries are expected to fall 4%, reflecting weaker short and medium-term growth prospects.
China reported vibrant 9.6% y/y real GDP growth in Q3-2010, despite policy normalization. he overall growth figure reflects strong domestic demand and is consistent with a pick-up in industrial production (7.9% in Q3, q/q, saar) following the pause in growth in the summer (3.9% in Q2). Robust retail sales and PMI surveys in September also underscore vibrant domestic activity. Inflationary pressures have picked-up slightly to 3.5% in Q3, up from 3% in the previous two quarters (q/q, saar). The contribution of net exports to growth was likely negative in Q3—with goods export growth slowing sharply to 4.1% from 33% in Q2, while imports rebounded to 9% after declining 7% in Q2 (volumes, q/q, saar). This better-than-expected performance is likely to be reflected in an upward revision to the Bank’s forthcoming growth forecast for China1
World oil demand declined in Q3-2010, in line with the slower pace of the recovery and efforts in China to improve energy efficiency. Global demand increased 0.4mb/d, just somewhat stronger than its average increase of 0.33mb/d during 2000-2007. For the year as a whole, oil demand is projected to average 87.3mb/d, about 1% above the 2007 pre-crisis peak. Despite the slower demand growth and still ample spare capacity, the price of oil has risen—from $76/bbl in Q3-2010 to $81/bbl (as of October 28, simple average of Brent, Dubai and WTI)—partly reflecting the depreciation of the US-dollar and financial investor interest. 

FDI flows to developing countries (LMICs) are expected to rise 17% in 2010. The pick-up reflects both stronger M&A and Greenfield investment, and was likely supported by low funding costs in high-income countries (HICs) due to quantitative easing. Particularly large gains were recorded in East Asia and Pacific (China, Indonesia, Malaysia) and Latin America (Chile, Mexico). Europe and Central Asia (Bulgaria, Romania) and South Asia (India) saw slight declines in flows. FDI flows to HICs appear to have declined 4% since 2009 on sovereign debt concerns and weaker short and medium-term growth prospects. The aggregate figure reflects large divestments from some countries (Belgium, Iceland, U.K., Ireland). Overall, LMICs’ share of FDI flows is estimated to have increased to 37% in 2010—up more than three-fold since 2000. FDI flows to HICs and LMICs remain 60% and 30%, respectively, below their respective pre-crisis peak flows (posted in 2007 and 2008).

1China Quarterly Update, November 2010 (scheduled to be released in early-November). 

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