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Prospects Daily: World Bank's Global Economic Prospects report urges developing countries to safeguard economic growth, as road ahead remains bumpy

The World Bank’s biannual Global Economic Prospects report released on January 15 says four years after the onset of the global financial crisis, the world economy remains fragile and growth in high-income countries is weak. Global GDP grew 2.3% in 2012, slightly below last June’s expectation of 2.5%. Global growth is expected to remain broadly unchanged at 2.4% in 2013, before gradually strengthening to 3.1% in 2014 and 3.3% in 2015. Overall, global trade of goods and services, which grew only 3.5% in 2012, is expected to accelerate, expanding by 6.0% in 2013 and 7.0% by 2015.

The report says that financial market conditions have improved dramatically since June. International capital flows to developing countries, which fell 30% in the second quarter of 2012, have recovered and bond spreads have declined to below their long-term average levels of around 282 basis points. Developing-country stock markets are up 12.6% since June, while equity markets in high-income countries are up by 10.7%.

Growth in high-income countries has been downgraded from earlier forecasts, at 1.3% for 2012 and 2013, firming to 2.0% in 2014 and 2.3% by 2015. Growth in the Euro Area is now projected to only return to positive territory in 2014, with GDP expected to contract by 0.1% in 2013, before edging up to 0.9% in 2014 and 1.4% in 2015. 

The weakness in high-income countries is dampening developing-country growth, but strong domestic demand and growing South-South economic linkages have underpinned developing country resilience, such that developing countries were responsible for more than half of global growth in 2012. Developing-country GDP is estimated to have grown 5.1% in 2012, and is projected to expand by 5.5% in 2013, strengthening to 5.7% and 5.8% in 2014 and 2015, respectively. Developing countries need to focus on raising the growth potential of their economies, while strengthening buffers to deal with risks from the Euro Area and fiscal policy in the United States.

Link to Global Economic Prospects January 2013

In other news…
Financial Markets…Net foreign buying of long-term U.S. financial assets (including government bonds, equities, and other assets) rose to better-than-expected $52.3 billion in November, compared with net sales of $1 billion in October, amid increased oversea demand for U.S .assets. Notably, net purchase of U.S. Treasury notes and bonds reached $26.4 billion in November, up from net buying of $12 billion October, with China and Japan remaining the biggest foreign holders of the assets.

China’s 2012 foreign direct investment (FDI) fell for the first time since 2009. Inbound FDI declined 4.5% in December from a year ago to $11.7 billion, while FDI inflows for the full year dropped 3.7% to $111.7 billion. In contrast, the country’s non-financial oversea investment rose 28.6% to $77.2 billion.

Developing-country stocks dropped to a 2-week low on Wednesday, with the benchmark MSCI index sliding 0.5%, as concerns over a global economic slowdown damped market sentiment. Meanwhile, the extra yields investors demand to buy developing-country sovereign debt over comparable U.S. Treasuries rose 1 basis point to 267 bps, according to JPMorgan Chase’s EMBIG Index.

High-income EconomiesUS industrial rose for the second month in December, rising by 0.3% (m/m) following a 1% gain in November, despite a drop in utility output reflecting warmer weather. Manufacturing (which accounts for three-quarter of all production) grew 0.8% (m/m) after a 1.1% increase in November, continuing to rebound after disruptions due to Hurricane Sandy and partly reflecting an increase in automobile sales.

US consumer price inflation slowed to 1.7% (y/y) in December from 1.8% in November. On a month-on-month basis, consumer prices were flat in December, as a fall in gasoline prices offset increases in other items. Core consumer prices, excluding food and energy, edged up by 0.1% (m/m).

Euro Area inflation remained at 2.2% (y/y) in December, in line with preliminary estimates, as a slower pace of increase in energy prices offset higher food price inflation.

Developing Economies…The CIPS Africa/Kagiso Tiso purchasing managers' index for South Africa fell to 47.4 in December from 49.5 in November, suggesting that South Africa's manufacturing sector continued to contract in December but at a faster pace. The December decline was to a large extent influenced by the employment sub-component with the relevant index falling by 7.3 points from a month earlier to 44.7 in December reaching the lowest level since August 2011.  On the production front, the outcome was more encouraging. The business activity index gained 1.4 points to 47.3, the best level since August 2012.

South Africa's retail sales rose by 3.4% (y/y) in November accelerating from 0.9% growth in October. On a monthly basis, trade in the retail sector increased 0.9% (m/m) in November after declining 1.8% in October.

According to the Turkish Statistical Institute, Turkey's consumer confidence dropped in December with the relevant index falling to 89 in December from 89.2 in November.

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