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Prospects Weekly: Domestic real credit growth among large middle-income countries accelerated toward the end of 2012

Global Macroeconomics Team's picture

After decelerating for several months, domestic real credit growth among large middle-income countries accelerated toward the end of 2012. While the credit expansion has supported a solid non-inflationary uptick in real-side activity in some economies, the output response has been subdued in others.  At the global level industrial production is picking up once again, albeit at different paces across regions. In December the pace of contraction in high-income countries eased, while economic activity in developing countries accelerated. Grain prices continue to ease, following the weather induced spike in Q3 2012, but still remain higher than a year-ago.

Credit growth in large middle-income countries has strengthened following monetary policy easing, but in some GDP growth remains elusive and inflation high. In an effort to spur growth several middle-income countries loosened monetary policy in the second half of 2012. Partly as a result, real domestic credit growth in Brazil, China, India, Russia and Turkey has picked up to varying degrees. Impacts to date are mixed. Industrial production has rebounded strongly in China and Turkey. In India, the pace of activity has strengthened but, growth rates remain well below historical averages. Meanwhile industrial activity in Brazil and Russia actually contracted in the fourth quarter. Worryingly, in the three economies where growth has not responded to looser monetary conditions, inflation remains stubbornly high (6.5-7.5%, 3m/3m,saar)– suggesting that structural rather than demand-side solutions may be needed to spur growth.

The cyclical uptick  in global economic activity is gaining strength,   albeit at a different pace across regions. For high-income economies, the pace of contraction in industrial production eased by some 2.6 percentage points between November (-5.6%, 3m/3m saar) and December (-3.0%, 3m/3m saar), supported by expanding output in the US and a slower contraction in Japan. Chinese industrial production accelerated for the third consecutive month in December, while output for the rest of the developing countries rebounded by a solid 6.3 percentage points (-4.1% in October to 2.2% in December). Purchasing manager’s indices (PMI) have improved even more sharply, reaching an 11-and 22-month high for the Euro Area and United States respectively in January, suggesting a continued improvement in industrial activity in Q1 2013. PMIs for developing countries have also strengthened, reaching multi-month highs for Brazil, China, India, Russia and Turkey.

The US dollar price of internationally traded grain prices continue to ease from their summer peak. Prices of wheat and maize have eased further in February, as the US Department of Agriculture’s February update delivered no surprises. Maize and wheat prices fell 5% and 3%, respectively since the beginning of February, and by 15% and 21% since their summer peaks. Nevertheless these prices remain 10% and 18% higher than a year ago. Despite the USDA's marginally better global maize outlook for the 2012/13 season, estimates of the stock-to-use ratio of maize are at their lowest level since 1972/73. Although conditions in the wheat market are less tight, its stock-to-use ratio is also low by historical standards. Rice remains well supplied with its stock-to-use ratio well within historical norms.

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