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Prospects Weekly: Capital flows to developing countries bounced back in September

Global Macroeconomics Team's picture
Capital flows to developing countries rose strongly in September, partially reversing a decline between June and August. Importantly, the rebound was visible in the data even before the announced postponement of U.S quantitative easing.  Retail sales growth accelerated in both high-income and developing countries,  together with improving economic activity and weaker non-oil commodity prices. But consumer confidence in the United States faltered as interest rates rose and fiscal uncertainties loomed. Global inflation accelerated in August with an increase in crude oil prices and the effects of earlier depreciations in many developing economies. This pickup in inflation and the associated currency pressures prompted monetary policy tightening in several developing countries. 
Capital flows to developing countries bounced back in September. Concern since May over the anticipated tapering of the U.S Federal Reserve’s monetary stimulus raised borrowing costs and weakened capital flows to developing countries. But flows began rebounding in late August, such that inflows for September – at $60.3 billion – almost doubled the monthly average of $33 billion during June-August. The rally was led by a surge in bond issuance (to $43 billion), as emerging market borrowers took advantage of still favorable market conditions, and continued after the Fed unexpectedly announced on September 18 that it would delay tapering plans. By contrast, equity flows are still about half of the level reached in the first five months of the year. Bank flows faltered in September, but have averaged about $18 billion/month this year, approaching levels seen prior to the 2008 crisis.
Retail sales have risen strongly in high income and developing countries, but consumer confidence faltered in the United States. Strengthening economic activity and weaker non-oil commodity prices have been reflected in improved demand for consumer goods. High income retail sales accelerated to an annualized 3.7 percent growth in the three months ending in July, from 2.7 percent the previous quarter. A rise in consumer confidence in the Euro Area since then suggests further gains ahead. But consumer confidence in the United States fell after mortgage interest rates rose, and as fiscal uncertainties loomed. Confidence and sales in Japan also dipped as growth rates slowed. Retail sales growth in developing countries rose to an annualized 12 percent pace in the three months ending in July (close to the long-term average), as domestic demand strengthened into the third quarter. Further improvement in activity is likely to support sales in Q4. 
Global inflation has picked up, prompting policy tightening in several developing countries. Despite ample spare capacity, high-income country inflation accelerated to an annualized 2.5 percent rate in the three months ending in August from 1.6 percent in July. Increases in crude oil prices (due to Syria-related tensions) caused inflation to accelerate, particularly in Japan and the U.S. Core inflation was broadly flat in the Euro Area, but decelerated in Japan as growth slowed (although inflation picked up on a year-on-year basis to its highest in five years). Developing-country inflation ticked up to an annualized 6.7 percent in August (6.2% in July), as earlier depreciations in several countries, particularly India, Indonesia and Turkey, and crude oil price increases fed through into overall inflation. This pickup in inflation, and associated currency pressures, prompted monetary policy tightening in Brazil, India, Indonesia and Turkey—partly reversing earlier easing.

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