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Prospects Daily: Chinese stocks and currency tumble on Tuesday, European Commission sees faster Eurozone recovery on firming domestic demand, South Africa’s Q4 GDP growth exceeds expectations

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Financial Markets…Chinese stocks dropped the most in five months amid worries over property markets and the country’s currency weakened the most in more than three years. The benchmark Shanghai Composite Index fell 2%, extending its four-day decline to 5.1%, led by a slump in property stocks on mounting funding concerns. China’s yuan depreciated 0.46% versus the dollar to 6.1266, the steepest drop since November 2010, spurred by signs Chinese economy is losing momentum.

Portuguese bonds advanced for a third day after the country said yesterday it will repurchase government debt maturing in 2014 and 2015 this week as it is trying to regain full access to debt markets before exiting its bailout program. Portugal is scheduled to exit a €78 billion rescue program granted in April 2011 by the European Union and International Monetary Fund on May 17. The yield on Portugal’s 2-year government notes fell 11 basis points (bps) to 2.10% today, after sliding 12 bps yesterday.

High Income Economies…On stronger domestic demand, the European Commission (EC) raised the Euro Area growth forecast for 2014 to 1.2% (y/y) from the 1.1% predicted earlier, and the projection for 2015 was lifted to 1.8% from 1.7%. The EC also cut its inflation projection for 2014 to 1.0% from 1.5%, and that for 2015 from 1.4% to 1.3%. Unemployment outlook were similarly more optimistic with the 2014 forecast being lowered from 12.2% to 12.0%, and that for 2015 being lowered to 11.7% from 11.8%.

On stronger foreign trade but weaker domestic demand, German GDP increased 0.4% (m/m sa) in Q4 2013 following a rise of 0.3% in Q3. According to provisional calculations, exports of goods and services jumped by 2.6%, while imports increased by not more than 0.6%. In terms of domestic demand, stronger gross fixed capital formation was partially offset by declining inventories and lower consumption expenditure. On an annualized basis, German GDP increased by 1.5% in Q4, compared to Q3’s rise of 1.3%.

Marking the completion of her first year in office, South Korean President Park Geun-hye unveiled measures to achieve 4 percent growth by 2017. The reforms include easing regulations on key service industries such as healthcare, education, tourism, finance and software, so as to boost growth through stronger domestic demand and reduce the economy’s reliance on exports.

Developing Economies…East Asia and pacific: China’s leading economic index rose markedly in January, climbing 1.2% to 283.4 after increasing 0.8% in December 2013, with five of the six individual components of the index posting positive growth. The consumer expectations index was the only component that was down. The coincident index, a gauge of current economic activity, moved up 0.2% in January, following a 1.5% increase in December.

Philippines’ merchandise imports fell 0.1% (y/y) in December 2013, driven by a decrease in imports of capital goods. At the same time merchandise exports rose 15.8% (y/y), boosted by higher sales of electronic products. This helped narrow the trade deficit, which fell to US$695 million from US$941 million. For the full year 2013, exports rose 3.6% while imports decreased 0.7%; and the trade deficit fell 23% to US$7.7bn from US$10.0bn in 2012.

Latin America and the Caribbean: Mexico’s retail sales jumped 2.2% (y/y) in December 2013, following a 1.9% (y/y) increase in November. Month-on-month, retail sales slowed in December, advancing 2.1% after rising 3.1% in November.

Sub-Saharan Africa: In the fourth quarter of 2013, South Africa’s economy grew at the seasonally adjusted pace of 3.8%, markedly up from the 0.7% expansion in the third quarter and faster than the consensus forecast of a 3.4% growth, helped by expansion in the manufacturing and mining sectors. Year-on-year, GDP grew 2.0% in Q4 2013, up from Q3's revised 1.7% (y/y) growth. For the year 2013 as a whole GDP grew 1.9%, slowing from the 2.5% growth recorded in 2012.

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