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Prospects Weekly: Record high auto sales, G-20 face sharp fiscal adjustment, emerging market bond spreads down but yields up

Global Macroeconomics Team's picture
The rebound in global output during the second half of 2009 was buoyed by “cash-for-clunker” incentive programs that propelled global car sales to a record high. As these programs have begun to expire, the pace of industrial production growth is expected to moderate in the coming months. High levels of public debt will require large—although not unprecedented—fiscal adjustments in many high-income countries over the next 20-years. Emerging market bond yields have climbed since late-2009, due to higher yields on benchmark U.S. Treasuries, although their spreads have remained broadly stable during the period. As U.S. bond yields increase further with the reversal of the Federal Reserve’s monetary stimulus measures, emerging market bond yields are likely to rise as well. 

Auto sale incentive programs supported record high global auto sales and a rebound in industrial production. Some countries that witnessed a marked revival in manufacturing activity in the second half of 2009 had car sale incentive programs. As these programs have recently expired in the U.S., Korea, Australia, and in most Euro Zone countries—or are about to in Brazil, India, and the U.K.—momentum growth in industrial production is expected to slow in the months ahead. This, alongside adverse weather conditions, appears to have been a contributing factor in the recent loss of momentum in industrial output in Germany. By effectively front-loading demand, these programs pushed global car sales to an all-time high of 54.3mn units in January 2010 (seasonally adjusted annualized rate, JP Morgan).


Many G-20 countries face significant fiscal adjustment. High government debt and aging populations will force many high-income countries (HICs) to undergo sharp fiscal consolidation over the next 20-years. The IMF estimates that—to regain a sustainable 60% debt-to-GDP ratio—the HIC G-20 will need to adjust primary fiscal balances (excluding interest payments) from a deficit of 3.5% of GDP in 2010 to a surplus of 4.5% by 2020 and then maintain a 4.5% surplus through 2030 (i.e., cut spending or raise revenues by an average of about 6% over a 20-year period). While challenging, such large adjustments are not unprecedented. For most developing countries (LMICs) no such adjustment will be required, as their debt ratios are much lower—40% in 2010 for the LMIC G-20 vs. 107% for the HIC G-20.


Emerging market bond spreads have declined from recent peaks in October 2008, although they remain about 80 basis points above the level posted during the 18-month period ending in June 2007. While bond spreads have been broadly stable since October 2009, benchmark U.S. Treasury yields have increased 50 basis points since end-November, pushing up the cost of capital for developing countries. Looking ahead, as non-traditional monetary stimulus measures (which have kept down medium-term interest rates in the U.S.) are withdrawn, developing country bond yields are expected to rise further—although perhaps not on a one-to-one basis with the rise in the cost of U.S. bonds.

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