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Prospects Weekly: Growth in China was 7.5 percent in the second quarter of 2014, Weak activity in the Euro Area and strengthening growth in the US, Steady stock-to-use ratios suggest that grain markets are adequately supplied

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Second quarter growth in China was broadly stable at 7.5 percent in line with expectations, with little indication thus far of a rebalancing away from investment towards consumption. Weak activity in the Euro Area and strengthening growth in the US have led to the widest level of the long-term yield spread in fifteen years. Steady stock-to-use ratios suggest a broadly stable outlook for most grain prices.
 
Growth in China was 7.5 percent in the second quarter of 2014, in line with expectations. A detailed composition of GDP is not yet available; however, high frequency data suggest that growth in the second quarter was increasingly driven by rising net exports. There is, as yet, little indication of a rebalancing of growth away from investment towards consumption, as fixed asset investment growth has continued at a steady pace throughout 2014. As in the previous three years, there have been several policy reversals. In the first quarter, the authorities tightened regulations on and clarified supervisory oversight over shadow banking, discouraged banks from lending to sectors with overcapacity, and urged local governments to ease demand for new projects. The authorities also signaled a willingness to impose investor losses by allowing a partial default of a trust loan to a coal mine in January and a bond issue by a solar company in March. These measures contributed to a slowdown in the first quarter in fixed investment growth, M2 growth, and total social financing. Since then, however, renewed policy support measures estimated at 2½ percent of GDP were implemented to support growth, including declines in required reserves and loan-to-deposit ceilings on banks, development bank lending, and additional fiscal spending. Such policy support is likely to ensure that the authorities’ growth target of 7-8 percent for 2014 is met; however, a rebalancing of growth towards a more sustainable path appears difficult.
Weak activity in the Euro Area and strengthening growth in the US have widened the long-term yield spread to its widest level in fifteen years. Since end-2013, yields on long-dated U.S. government securities—especially on 10-year and 30-year bonds—have fallen sharply, while shorter-dated bond yields remained broadly stable, resulting in a significant flattening of the yield curve. However, robust employment data and rising inflation expectations in the U.S. have driven policy-sensitive short-term yields somewhat higher in recent weeks, providing an early indication that financial markets expect policy normalization to draw nearer. Over the same period, German 5- and 10-year bond yields have even fallen further than U.S. yields, especially since mid-June when the European Central Bank announced unprecedented stimulus measures amidst deflation fears and disappointing economic activity indicators in the Euro Area. As a result of the perceived divergence in growth and inflation prospects in the Euro Area and the United States, the yield spread between the U.S. and German 10-year bonds has reached its widest level since June 1999.
Steady stock-to-use ratios suggest that grain markets are adequately supplied, supporting a broadly stable outlook for most grain prices. In its July assessment, the U.S. Department of Agriculture maintained a comfortable outlook for maize, rice, and oilseeds for the upcoming, 2014/15, season. The wheat market, however, is still tight as yields are projected to retreat from last year's record, causing production shortfalls in the world's key suppliers (U.S., Canada, and Australia). A key risk at this stage is El Niño, the probability of which is assessed currently at 70 percent. If 2014 becomes an El Niño year (the last was in 2009-10), then a number of commodities produced in the Southern Hemisphere, including wheat, rice, and some edible oils, could suffer losses.

 

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