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Prospects Weekly: GDP growth moderated in China, Capital goods bode well for growth prospects in both developing and high-income countries, Backward-looking price-to-earnings ratios are about 15 percent

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GDP growth moderated in China, but firmed among other developing countries in the final quarter of 2013, and remained steady in high income countries. A fourth quarter acceleration in capital goods orders in both developing and high-income countries bodes well for future growth prospects. Price-to-earnings ratios of equities in developing countries have remained depressed since 2011, partly reflecting slower growth, weaker commodity prices, and increased risk perceptions.
Notwithstanding weaker Chinese growth, GDP growth in most developing countries picked up in Q4 2013. The annualized pace of GDP growth in developing countries (excluding China) picked up from 4.8 percent to 5.6 percent in 2013Q4. In China, growth slowed from an annualized 9.3 percent to 7 percent amid rising uncertainties about investment and corporate debt and the waning effects of an earlier mini-stimulus. Weak domestic demand (partly reflecting policy tightening) resulted in slowing industrial activity in India and disappointing fourth quarter GDP growth in Mexico. By contrast, growth in East Asian countries excluding China continued to strengthen, supported by acceleration in exports, as well as robust domestic demand in Indonesia, Malaysia and the Philippines. Similarly, the Europe and Central Asia region benefited from strengthening Euro Area demand. South Africa’s growth accelerated in Q4 as the effects of earlier strikes on domestic activity waned. Growth in high-income countries remained stable at about 2 percent, buoyed by robust private demand, and a pickup in exports in Germany, France and the United States. Growth in Q4 in Japan was a modest 1 percent as the effect of stimulus measures waned and the country prepares for structural reform.
Improved orders of capital goods bode well for growth prospects in both developing and high-income countries, with some exceptions. Capital goods orders by developing economies expanded at an almost 8 percent annualized pace (3m/3m saar) in the fourth quarter of 2013. This follows a sharp decline during mid-2013, as tapering-related interest rate increases and capital flow declines cut into business confidence. The recovery in orders bodes well for future growth, although financial market tensions since late January may also play a negative role. Orders for capital goods in the United States turned positive in December, rising at a 3.2 percent annualized pace, as earlier uncertainty associated with fiscal policy brinkmanship abated and growth prospects improved. Euro Area orders for German machinery also surged, suggesting a broadening recovery in the currency union. But in Japan, after hitting a 4-year high in May 2013, capital goods orders have slowed. Going forward, business sentiment indicators suggest expectations of better growth performance in both high-income and developing countries.

Backward-looking price-to-earnings ratios are about 15 percent below long-term averages among developing countries, but about 8percent above in high-income countries. The 12-month trailing price-to-earnings (p/e) ratio of developing-country stocks has declined to 11.3 (from a post-crisis peak of 24), which is about 15 percent lower than its long-term level of 13.3. High-income country p/e ratios are rising – having reached 19.1, about 8 percent higher than their long-term average of 17.7 (historically emerging-market p/e ratios are much lower than those in high-income countries reflecting elevated market risk). The low developing-country valuations have persisted since 2011 and partly reflect reduced developing-country growth prospects, lower commodity prices, and increased risk perceptions due to external vulnerabilities and political crises in some countries.

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