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Prospects Weekly: Industrial output growth in developing countries has weakened, Retail sales growth across developing countries remains mixed, Developing country borrowing costs have eased slightly

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Industrial output growth in developing countries has weakened despite surging exports, reflecting growth at close to capacity in some of the larger middle-income economies. In addition, domestic activity, including retail spending, has been constrained by commodity market and financial headwinds over the past year. More positively, diminished financial market tensions have reduced developing country bond spreads, which coupled with still relatively low long-term US rates has helped ease borrowing costs for developing countries somewhat.
Developing country industrial production growth remained weak in Q4, despite a surge in exports. China’s industrial output growth slowed sharply, to a 5.6% (3m/3m) annualized pace in February vs. 13% in October. Although the weakness is likely overstated by the Lunar New Year celebration – a ten day period when most of the country shuts down – activity, spending and confidence data suggest that the economy is cooling in response to policy efforts to rebalance and reduce growth to a more sustainable pace. Industrial activity in India remains volatile, having fallen at a 4.9% pace in Q4 2013 (after 9% growth in Q3). Output appears to be stabilizing since then, with manufacturing PMI surveys suggesting a return to positive momentum in Q1 of this year. Activity in the remaining developing countries picked up at the end of 2013, although growth remained weak, averaging 2.4% in the three months to January. The lackluster industrial performance contrasts with developing country (ex China) exports which surged at a 20.8 (15.6)% annualized pace in Q4. The softness partly reflects capacity constraints, especially in some of the larger middle-income countries. Financial headwinds, including modest monetary policy tightening, and lower commodity prices have likely contributed to the slowing of domestic activity.
Retail sales growth across developing countries remains mixed. Developing country retail sales growth stabilized in Q4 2013 at about 12% (saar), slightly below its post-crisis average of 14%. Nonetheless, there exists considerable heterogeneity in performance across countries. Positive spillovers from a strengthening Euro Area economy contributed to above average sales growth in Romania and Hungary. Reflecting the underlying strength of domestic demand in the Indonesian economy, retail sales growth has rebounded solidly through January 2014 following the financial market turmoil related dip in October. Retail spending in China grew at a double digit pace in Q4, but indications are that it has slowed since then. In contrast, ongoing policy tightening is biting into retail sales in Brazil. In both Turkey and South Africa, retail sales fell in December, reflecting weakened sentiment and interest rate hikes. While dampening growth, these developments are welcome as they can be expected to help reduce high current account deficits and economic vulnerability in each country. The retail sales contraction in Thailand mainly reflects the troubled political climate there.

Developing country borrowing costs have eased slightly as spreads have narrowed relative to still low US long-term rates. In line with an easing in financial market tensions, developing country bond spreads have fallen back to levels at the end of 2013 after spiking some 50 basis points in late January/early February. That bout of volatility occurred in the context of the start of tapering of monetary stimulus in the US, but was triggered by the unrelated Argentine depreciation, concerns on Chinese growth and debt, and adverse political and economic developments in some middle income economies. The market volatility induced some flight to safety, which pushed down US long term yields some 40 basis points compared with their peak of 3% in late December. US long rates have since increased, but only slightly (by about 14 basis points) reflecting still strong appetite for safe assets given concerns about global growth and tensions surrounding the Ukraine and Russia). Combined with narrowing spreads, this has helped reduce average developing country borrowing costs to 6.2% (vs 6.5% in early February).

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