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Prospects Daily: European Central Bank (ECB) indicates to pledge unlimited, sterilized bond-buying ahead of the ECB meeting

Important developments today:

1. Financial Markets

2. Among developing economies

Financial Markets…European Central Bank (ECB) said to pledge unlimited, sterilized bond-buying. Ahead of ECB's official announcement tomorrow, there are reports that bond-buying proposal involves unlimited purchases of government debt that will be sterilized giving a neutral impact on money supply and cooling fears of inflation. The plan is also said to only focus on government bonds rather than a broader range of assets and will target short-dated maturities of up to about three years. The euro jumped half a cent on the report, Spanish 10-year government bonds yields declined slightly, and European stocks advanced but only up to 1%.

Other stock markets were mostly weak today on continuing concerns about the economic slowdown. Asian and most emerging market stocks closed slightly lower with Shanghai Composite Index dropping to the lowest level since February 2009. US stocks were weak in early trading.  
  
Among developed economies…Euro Area retail sales fell 0.2% (m/m) in July following a 0.2% increase in June, as consumers cut back on spending amid the broader downturn in the Eurozone economy, high unemployment and fiscal austerity. Australia's GDP growth slowed to 0.6% (q/q) in the second quarter of 2012, from 1.4% in the first quarter. Slowing commodities demand is reportedly causing mining companies to scale back projects this quarter. Switzerland’s GDP posted a 0.1% (q/q) drop in the second quarter of 2012 following a 0.5% increase in Q1; consumer prices remained flat (m/m) in August after a 0.5% fall in July, remaining negative (-0.5%) on a year-on-year basis.  The UK services sector reported a rebound in August with the Markit services PMI jumping to 53.7 in August from 51.0 in July (Above 50 indicates expansion). Canada’s central bank kept its benchmark interest rate at 1%. US non-farm productivity rose to 2.2% (q/q) in the second quarter from 1.6% in the first quarter, while unit labor costs fell to 1.5% from 1.7%.

Among Emerging Markets

In East Asia and Pacific, the HSBC manufacturing PMI for Vietnam increased to 47.9 in August, up from 43.6 in July still indicating to difficult business conditions. The Bank of Thailand kept its policy rate unchanged at 3.0 percent. Thailand's inflation eased to 2.69% (y/y) in August from 2.74% in July and the core CPI followed a similar trend with a 1.76% (y/y) increase in August below the central bank's target range of 0.5-3.0 percent. In Philippines, inflation increased to the seven-month high 3.8% (y/y) in August. In China, the HSBC services sector activity index fell from 53.1 to 52.0 in August. The HSBC Composite Output Index (covering manufacturing and services) fell from 51.9 to 49.9 in August reflecting a continued decline in manufacturing output.

In Europe and Central Asia, in Russia, consumer price inflation rose to 5.9% (y/y) in August from 5.6% in July reaching the upper limit of the central bank’s annual inflation target. In Turkey, inflation eased to 8.9% in August (y/y) from 9.1% in July. Poland’s central bank kept the benchmark seven-day interest rate at 4.75 percent for a fourth month at the highest level since 2009 even after the economy expanded at the weakest pace in almost three years.
In Latin America and Caribbean, in Brazil, inflation eased to 5.24% in August (y/y) from 5.20% in July.

In South Asia, in India, the HSBC services sector activity index posted 55.0 in August, up from 54.2 in July. The HSBC Composite Output Index posted 54.3 in August, pointing to some improvement in the Indian private sector activity.

In Sub-Saharan Africa, Uganda's central bank cut its key lending rate for the fourth straight month on Tuesday to spur private credit growth. The 200 basis point cut, leaves the Bank of Uganda's benchmark rate at 15.0 percent from a high of 21 percent earlier this year.
 

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