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Prospects Weekly: Headwinds from Euro Area likely to persist through the second quarter of 2012

Global Macroeconomics Team's picture

Latest business surveys for the Euro Area suggest that the nascent recovery in activity in the region may be shortlived. Recent data suggests that Euro-Area deleveraging has had a negative impact on trade finance, but that trade finance availability should firm during 2012. Developing countries have made substantial progress toward reducing global poverty, but progress reducing child and maternal mortality rates (two factors closely linked to nutrition) has lagged.
 

Headwinds from Euro Area likely to persist through the second quarter of 2012. After Euro Area industrial production accelerated through February 2012, recent business surveys have taken a turn for the worse, suggesting that the recovery in activity may be short lived. Markit’s Purchasing Manager’s Index for both manufacturing and services in the Euro Area dipped deeper into contractionary territory in April. Although not conclusive, the decline suggests that the ongoing banking sector deleveraging, fiscal consolidation, rising unemployment, high-oil prices, and recent renewed concerns on Euro Area sovereign debts will continue to weigh on real sector activity in Q2. Continued European weakness bodes ill for developing country exporters.

 

Trade finance for firms in developing countries appears set to firm after recent weakness. European banking-sector deleveraging cut into trade finance flows as measured by Dealogic in the second half of 2011. Europe (includes both high-income and developing European economies) had been hardest hit, with Q1 2012 flows well below the levels observed even in Q4 2011, when European trade activity was falling at a 29.5 percent annualized pace. In developing regions the story is more mixed. In East Asia and Latin America the data shows some pick up perhaps reflecting entry of regional banks into the trade finance arena. In the Middle East the dissipation of some of the turmoil associated with political change in North Africa has supported flows. Trade finance flows to Africa are also up slightly. However, in South Asia, which witnessed a sharper Q4 2012 trade contraction, flows remain down. A recent ICC-IMF survey observed that the majority of respondents expected an improvement in the outlook for trade finance in 2012.

 

Developing countries make progress towards the Millenium Development Goals (MDGs). Two of the MDGs (benchmark development objectives for the year 2015 set by the UN in 2000) have been met, with a halving of global poverty rates and of the proportion of people without access to safe drinking water. However, MDGs closely linked to food and nutrition are lagging. One conservative estimate suggests that over 200 million children under five years of age in developing countries fail to reach their cognitive development potential because of risks of poor nutrition and poor health. Despite its critical role, only about 0.3% of aid flows are oriented toward nutrition. In recent years, progress has been further complicated by high food prices, which affect diet quality, real-incomes and access to quality of care for infants and young children.

 

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