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Prospects daily: Moody's cuts Greek credit rating; U.S. industrial output remains robust

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Important developments today:

1.  Moody’s slashes Greece’s debt rating to junk, pushing up borrowing cost

2.  U.S. industrial production posts strong growth in May

3.  New housing construction plummets in May


Moody’s slashes Greece’s debt rating to junk, pushing up borrowing cost. Greece’s credit rating was cut to sub-investment grade on Monday by Moody’s Investor Service, deepening concerns about the ongoing European debt crisis and causing risk aversion to rise. The rating agency downgraded the sovereign rating of the debt-ridden euro-zone country by four notches to ‘Ba1’ from ‘A3’ and said the move reflects “substantial” risks to economic growth from the austerity measures tied to the joint aid package from the European Union and the International Monetary Fund. The move follows the downgrade of Greek debt to junk by Standard & Poor’s on April 27.

The relative cost of borrowing for Greece continued to rise following Moody’s rating cut, pushing the Greek 10-year bond yield up by 55 basis points (bps) to 8.89%. The yield difference, or spread between Greek 10-year bonds and comparable German bonds widened by 52 bps to 622 bps, making it harder and more expensive for the country to access credit markets. The spreads on Spanish and Portuguese bonds also widened, with the Portuguese-German spread increasing 9 bps to 268 bps, the most in a week.

As a result of the downgrade, Greek government bonds will be removed from several major benchmark bond indexes, including Barclays Capital’s Global Aggregate and Citigroup’s World Government Bond Index, which could further undermine demand for the country’s assets. Investors may be forced to sell their holdings of Greek bonds in compliance with their investment criteria mandate or because Greece will be excluded from the major bond gauges.


Emerging market equities remain robust. Developing country stocks rose for a seventh day, the longest winning streak in two months, as investor speculation on the global economic recovery remained positive. Investors’ optimism grew after U.S. data yesterday showed New York-area manufacturing expanded for an 11th month, followed by the strongest growth in industrial output in May in 8 months. The MSCI Emerging Market Index advanced 0.3% today, bring its seven-day gain to 5.7%, with Romania’s BET Index jumping 3.2%, the biggest gain among 93 national indexes. The MSCI EM gauge has gained 107% from its October 2008 low, compared with a 33% gain in the MSCI World Index, after governments pledged about $12 trillion to stimulate the global economy.


Source: Federal Reserve  


U.S. industrial production posts strong growth in May. Industrial output in the U.S. grew by 1.2% (m/m) in May, the strongest monthly pace recorded since August 2009, in a clear sign that the manufacturing sector recovery remains largely unaffected by the Euro Area debt crisis. On an annualized basis, industrial output grew 6.1% in May, up from an annualized pace of 5.4% in the previous month. Indeed, industrial output has been growing an an average annualized pace of 7% this year. The increase in production was led by a 5.5% (m/m) increase in the output of motor vehicles and parts, following a 1.4% drop in the previous month. Output at utilities rose 4.8% for the month, while mining activity (which includes off shore drilling) declined by 0.2% over the same period. The growth in factory output was of a broad based nature, with business equipment production increasing 1.3% (m/m), and consumer goods production rising 1.2%. Capacity utilization in the manufacturing sector rose to 74.7%, up from 73.7% in April, getting close to the pre-crisis average utilization rate of 80%.


New housing construction plummets in May…The construction of new single family homes plunged by 10% (m/m) in May to an annualized rate of 593,000, the lowest rate recorded this year. The reduction in construction was generally expected following the expiration of the Federal tax credit program for home purchases in April, when the annualized surged to a 17-month peak of 659,000. However, the severity of the decline in new construction in May signals that the housing market will struggle this year without support from government incentives.


Among emerging markets:

In East Asia and the Pacific, China’s leading indicator rose by 1.7 percent to 147.1 in April, gaining the most in 14 months, signaling that the Chinese economy is maintain momentum even as Europe’s sovereign debt crisis threatens the global recovery. There are concerns however of rising risks of non-performing loans in the real estate, and that weakness in exports could weaken growth in coming months.

In South Asia, Sri Lanka’s central bank kept its reverse repurchase rate and the repurchase rate unchanged at 9.75% and 7.5%, respectively, for the seventh consecutive month, as inflation is decelerating. Consumer price inflation decelerated to 5.2% in May year-on-year, down from 5.8% in April, and an average of 12.6% in the five years through 2009.

In Latin America and Caribbean, Brazil’s retail sales growth eased to 9.1% year-on-year in April, down from a 15.7% pace in March, signaling that the expansion rate may be moderating. Retail sales declined 3% on the month, the most since the series began in 2000. Meanwhile unemployment declined 7.3% in April, down from 7.6% in March, while consumer confidence rose to its highest level since March 2008 in May. Mexico’s car and light truck production jumped 65% year-on-year in May, to 178,738 units, according to the Automobile Industry Association. Domestic sales rose 15% to 61,632 vehicles, while exports rose 74% to 145,909 units.

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