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Prospects Weekly: Global recovery at a new stage

Global Macroeconomics Team's picture
The large gap in global capacity utilization has narrowed substantially since March 2009, led by a strong rebound in developing countries. Although it has also come down, excess capacity remains much more pronounced in high-income countries, given their lagged and slower pace of recovery. In concert with higher capacity utilization rates, inflationary pressures have firmed somewhat in 1H-2010 over 2H-2009 in developing countries on strengthened private consumption (led by South Asia)—but remain below pre-crisis levels. Cross-border debt flows to emerging markets rose modestly in June from very low levels in May, fully driven by corporate bond issuance. Continued lack-luster bank-lending has contributed to a shift to corporate-bond financing, which reached $53bn in 1H-2010, up 82% vs. the pre-crisis level in 1H-2008.
Differentiation in the pace of economic recovery between high income and developing countries is evident in the shifts in capacity utilization rates. Excess capacity in developing countries has diminished significantly, as over two-thirds of the gap posted in Q1-2009 (vs. the pre-crisis trend) has closed. Spare capacity in high-income countries has also diminished, but only by about one-third over the same period—reflecting a lagged and slower pace of recovery in output. Capacity utilization in the U.S., for example, reached 74.1% in June 2010, up from a post-crisis low of 68.2% in June 2009—but remains 7.3 percentage points below the long-term average (1967-2007). An expected deceleration in global output in 2H-2010 is likely to be mirrored in slower gains in capacity utilization—or even declines in utilization rates in some cases. 
The median global inflation rate rose in 1H-2010 vs. 2H-2009, although it remains below pre-crisis levels. Price pressures firmed in developing countries (LMICs), led by a rekindling of headline inflation in South Asia. This reflects a strengthening in domestic demand and somewhat accommodative monetary conditions. In contrast, moderating price pressures—with deflation in some countries (Ireland, Japan, Spain, notably in core prices)—has recently become evident in some highincome countries (HICs), given weak domestic demand and fiscal austerity measures. Global price pressures are likely to ease ahead, given an expected moderation in economic activity and lagged transmission of moves toward monetary policy normalization (policy-rate hikes) in some countries (Brazil, India, and Peru, among LMICs). Disinflation—and in some cases deflation—could become more pronounced in some HICs. 
Emerging market debt-inflows from abroad inched up in June, after sharply reduced flows in May tied to European debt woes. Corporate bonds fully accounted for the rise with 14 deals. No EM-sovereigns sought bond financing and banklending was unchanged. However, in 1H-July, Mexico successfully launched a $1bn sovereign-bond. As bank-lending has remained extremely low (partly reflecting consolidation of balance sheets), corporations have increasingly turned to bond markets. Spreads for EM-corporates have narrowed from 1,140bps in Oct-2008 to 371bps in Jul-2010, as investors’ appetite for EM-assets has improved. In contrast, corporate bond issuance has declined in the U.S. and Europe by 29% and 33% (y/y), respectively, in 1H-2010. 

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