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Prospects Daily: Italy credit rating cut, Greek IP momentum builds, China exports and imports fall

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Financial MarketsItaly’s sovereign credit rating was cut to ‘BBB’ from ‘BBB+’ by Standard and Poor’s due to a weakening of the country’s economic prospects and financial system. S&P also said in a statement the outlook on the rating, two levels above junk status, remains negative. Italy’s benchmark 10-year yield rose 5 basis points to 4.45%, the most since July 3.

Turkey’s sovereign credit default swaps (the cost of protecting against default on Turkish government debt) jumped 17 basis points to 220 bps on Wednesday after Fitch Ratings said prolonged social unrest could put the country’s investment-grade status at risk. The nation’s stock markets declined 1.4% and the lira weakened 0.4% against the dollar on rating concern.

Egypt’s credit risk is gearing for the steepest drop since 2011, with 5-year credit default swaps sliding 125 basis points to 692 bps in afternoon trading, after Saudi Arabia, the United Arab Emirates, and Kuwait pledged $12 billion of aid. The yield on the government’s benchmark bonds due April 2020 also fell 26 bps to 9.13%, while the country’s benchmark stock index gained 0.7% on Wednesday.

High-income EconomiesJapan’s consumer confidence index slipped from as seasonally adjusted 45.7 in May to 44.3 in June, the first fall in six months, with sentiment deteriorating across the four components of the survey – livelihood, income, jobs and spending appetite for durable goods. A reading below 50 indicates that pessimists outnumber optimists
Greek industrial production recorded a 1.2% (m/m) increase in May versus a flat reading in April. Overall momentum improved to 23.3% (3m/3m saar) from 6.0% in April and  considerably better than the average 30% falls between December and March.

Portugal's EU harmonized inflation accelerated more than expected in June to 1.2% (y/y), the highest level in six months. Prices rose by 0.9% in May. Core consumer prices, which exclude unprocessed food and energy, increased 0.6% on an annual basis in June, after growing 0.5% in the previous month.

Developing EconomiesEast Asia and Pacific: China’s exports and imports both fell in June, with exports falling 3.1% (y/y), down from a 1% (y/y) in May, and far below the 10.4% average growth for the first half of 2013. Imports slipped 0.7% (y/y), down from a 0.3% (y/y) decline in May and also far below the 6.7 per cent average increase in the first half of 2013 in an indication of sluggish domestic demand.

Europe and Central Asia: Romania's industrial production contracted 2.1% in May, down from a surge of 8.5% (y/y) in April. On monthly basis, industrial production dropped a seasonally adjusted 10.7%.

Middle East and North Africa: Egypt’s inflation accelerated to 9.8% (y/y) in June, the most in two years, an increase from 8.2% (y/y) in May and the highest since July 2011’s 10.4%. The food prices drove the increase as they surged by 12.7% (y/y) in June.

Separately, Saudi Arabia and the United Arab Emirates have pledged a total of $8bn to Egypt to help prop up its ailing economy, in a mix of cash, central bank deposits and oil products, as the new Egyptian administration grapples to halt the slide in the local currency and stave off a foreign exchange reserves crisis. With foreign reserves standing at $14.9bn at the end of June and with $1bn worth of commitments to Paris club debtors in July, Egypt was dangerously close to dropping below three months of import cover.

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