|The stalemate in US budget negotiations and rising concerns about a potential technical default on US debt has gradually affected market confidence. Contagion to developing countries has been limited but is likely to increase in the absence of a lasting resolution. Investment spending showed signs of improving further in the third quarter in high income economies, supported by strong consumer spending and still easy financial conditions. The outlook, however, remains vulnerable to downside risks from fiscal policy uncertainty in the US. Officially recorded remittance flows to developing countries are projected to increase by 6.3 percent to reach $414 billion in 2013.|
|As the 17 October deadline for raising the US debt ceiling approaches, markets are re-pricing risk on key US assets. Since September 19, the US S&P 500 is down 3.3 percent, the VIX risk index up 14 percent and yields on 1-month US T-bills have increased sharply. Spillovers to developing countries have been muted thus far, with stock markets correcting 0.8 percent over the same period and bond spreads only up 9 basis points. However, contagion is likely to increase in the absence of a lasting resolution. A similar stand-off during the August 2011 US debt ceiling debate left significant financial turbulence in its wake despite a final hour deal. In the months that followed, developing countries’ spreads rose 75bp, while stock markets and bond and equity issuances fell by 15 and 50 percent respectively. Past the October 17 deadline, the impact of an actual technical default are difficult to predict and will heavily depend on containment strategies. But a crisis scenario with consequences comparable to those of the 2008 financial crisis is possible.|
|Investment is showing further signs of improvement in high income economies. Investment spending in the US, Japan and Germany rebounded in Q2, with growth of 6 percent or more (q/q saar) after a weak start to the year. With interest rates still relatively low and consumer spending holding up, business confidence has lifted to multi-year highs (despite the rise in bond yields since May). Growth in capital orders accelerated in Germany in August while core orders (excluding transport) remained strong in the US. Barring a negative shock from the fiscal policy impasse in the US, capital expenditures should lift further. September surveys show business spending intentions are at their highest since March 2011 in regional US Fed surveys. Japan’s Tankan survey reports rising fixed investment by manufacturers and Germany’s IFO survey points to improving expectations among capital goods producers. Low inventory levels in Japan and Germany relative to pre-crisis averages are contributing to the rebound.|
|Officially recorded remittance flows to developing countries are projected to increase by 6.3 percent to reach $414 billion in 2013 but remain broadly stable as a share of recipient GDP. Based on new migrant stock estimates by the UN Population Division (232 million), and consistent with an expected strengthening of the global economy, remittance flows to developing countries are projected to rise by an annual average of over 8 percent during 2014-2016. Remittance flows to developing Europe and Central Asia, and Latin America and the Caribbean are projected to grow most rapidly, supported by strengthening activity in Euro Area and the US respectively. Nonetheless, high transactions cost continue to hinder remittance flows. In 2013, the global average costs for sending remittances remained broadly unchanged at about 9 percent.|
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