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Prospects Weekly: Pause in global industrial production volume growth appears to be coming to an end

Global Macroeconomics Team's picture

The cost of insuring against default has continued to rise for sovereign debt in several Euro Area countries, after Portuguese and Irish debt were downgraded and a series of possible downgrades were announced. In contrast, rates for developing countries either eased or were broadly stable. The pause in global industrial production volume growth that took hold in Q3-2010 appears to be coming to an end. Recent data shows strengthening production in China and Germany, rising retail sales in Europe, Japan and the United States, and further pickups in new orders. While merchandise export volumes in high-income countries in October reached 98% of their August 2008 levels, they remain well below pre-crisis peaks and 19% lower than the level that might have been expected had trade continued to grow at pre-crisis rates.
A wave of possible credit-rating downgrades has contributed to higher credit-default swap rates for the sovereign debt of several credit-stressed high-income European countries. An easing of pressures following Ireland’s bailout at end-November proved temporary, as CDS-rates began to rise again from mid-December for Belgium, Greece, Ireland, Portugal and Spain, triggered by announcements of possible downgrades by major credit-rating agencies—and after Moody’s slashed Ireland’s debt by five levels (to Baa1 from Aa2) and Fitch downgraded Portugal. The rating agencies cited concerns about funding requirements and high borrowing costs. CDS spreads held steady or eased for developing countries. This week’s 30-year, $1bn peso-denominated bond sale by the Philippines and a similar large sale by Turkey (both at yields of about 6.25%) suggest markets continue to evaluate developing country risks favorably. 
The deceleration in growth of global industrial production may have bottomed out in 3Q-2010. Global industrial output decelerated from an 8.7% annualized pace in Q2-2010 to 1.2% in Q3-2010, the slowest pace since the recovery took hold (3m/3, saar). The slowdown reflected the unwinding of “bounce-back” factors that had supported the rebound in activity (inventory restocking and positive base effects). Most recently, output shows signs of accelerating. Industrial production in China and Germany has picked up, tied to firming domestic demand. Activity in Europe and Central Asia is also up, led by Russia and Ukraine. A surge in German factory orders of 5.2% in November (m/m, sa, volumes) on buoyant foreign demand—combined with strong holiday retail sales in the United States, Europe and Japan—suggest a broadening in the trend ahead. 

In October 2010 merchandise export volumes in high-income countries regained 98% of their August 2008 levels,  up from 91.7% in January 2010. While the recovery is encouraging, trade volumes remain well below their pre-crisis peaks and the level that might have been expected had trade continued to grow at pre-crisis rates. Indeed, high-income countries’ export volumes are at the same level as in the beginning of 2007 and still about 10% below their pre-crisis peak in April 2008. In contrast, developing countries’ export volumes have exceeded their pre-crisis peak by 1.3% (as of October 2010). Compared with their pre-boom trend, high-income exports are 19% below what might have been expected, while developing countries are 7% lower.

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