Global Economic Prospects 2014

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Prospects Daily: U.S. Treasury yields hit near 11-month lows, U.S. GDP shows first contraction since 2011, Philippines’ GDP growth slows in Q1

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Financial Markets

U.S. treasury bonds advanced for a fourth day on Thursday as revised GDP data showed the U.S. economy shrank in Q1 for the first time in three years. Weaker-than-expected housing reports also boosted demand for safe-haven government debt. The benchmark U.S. Treasury 10-year yield fell 3 basis points to 2.41%, after touching 2.49% earlier, the lowest level since June 21. Long-term U.S. Treasury bonds have performed well this year amid the expectation that the U.S. economy is likely to have moderate growth without significant inflationary pressures.

Italy’s sovereign borrowing costs fell to a record low at the country’s new bond auction today. Europe’s second most indebted nation sold €7.5 billion ($10.2 billion) of government securities maturing in five and ten years. The Rome-based Treasury auctioned €3 billion of 10-year bonds at an average yield of 3.01%, the lowest rate for similar-maturity securities since the euro was created. Italy also sold €2.75 billion of 5-year bonds at a record low yield of 1.62%, compared with 1.84% at a previous auction last month, along with the sale of €1.75 billion in 5-year floating-rate notes.

High Income Economies

Primarily reflecting a downward revision to private inventory investment and an upward revision to imports, U.S. GDP growth for Q1 2014 contracted by 1.0% (q/q saar), compared to the initial estimate for a 0.1% uptick. Economists had been expecting a smaller contraction of about 0.5%. With the downward revision, U.S. GDP contracted for the first time since the 1.3% decrease seen in Q1 2011.

At the same time, U.S. first-time jobless claims in the week ended May 24th dropped to 300,000, a decrease of 27,000 from the previous week's revised level of 327,000. Economists had been expecting jobless claims to dip to 317,000 from the 326,000 originally reported for the previous week. With the latest decrease, jobless claims pulled back near the seven-year low of 298,000 set in the week ended May 10th. The less volatile four-week moving average dipped to 311,500 from the previous week's revised average of 322,750, hitting its lowest level since August 2007. Similarly, continuing claims fell to 2.63 million in the week ended May 17th from the previous week's revised level of 2.65 million.

Accelerating for the third consecutive quarter and the fastest in six years, the Spanish economy advanced 0.4% (q/q) in Q1 2014, unchanged from the preliminary estimate. Driving the increase was a 4.4% surge in government expenditure and a 0.4% increase in household consumption. Meanwhile, gross fixed capital formation shrank 0.6%, exports fell by 0.3% and imports advanced 1.5%. Year-on-year, the economy advanced 0.5% (y/y) in Q1.

Developing Economies

East Asia and Pacific

Philippines’ GDP grew at the annual rate of 5.7% (y/y) in Q1 2014, the slowest rate of expansion in over two years, following a revised 6.3% increase in Q4. Contributing to this slowdown, household consumption growth eased slightly to 5.8%, while gross fixed capital formation increased at a slower 7.7% pace, following a 22.4% expansion in Q4. Additionally, government consumption rose 2.0%, after contracting 0.4% in Q4, exports rose by 12.6% faster than the 3.2% growth in Q4, while imports grew by 8%. Quarter-on-quarter, GDP grew a seasonally adjusted 1.2% in Q1, slower than the revised 1.7% growth in the previous quarter.

Latin America and the Caribbean

Brazil’s central bank decided to keep the Selic rate, its key policy rate, unchanged at 11.0%, which was as expected, amid inflation concerns and a weak economic outlook. The central bank has raised the policy rate by a cumulative 375 basis points since April 2013, following a sharp depreciation of the currency.

Sub-Saharan Africa

South Africa’s producer price inflation accelerated in April, driven by higher cost of intermediate goods and electricity. Producer prices of manufactured goods rose 8.8% (y/y) in April, exceeding economists’ forecast of a 8.4% increase, and faster than March’s 8.2% (y/y) rise. Month-on-month, producer prices rose 1% in April, higher than forecast, but slower than the 1.3% increase recorded in March.

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