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Prospects Weekly: Retail sales growth diverges across high-income and developing countries.

Global Macroeconomics Team's picture
While picking up some momentum in high-income countries, retail sales decelerated across developing countries at the start of 2014, especially in China where domestic demand showed signs of weakness amidst tighter financing conditions. Credit cycles are starting to turn across developing countries, but private debt was still rising as a share of GDP up until the third quarter of 2013, reflecting past excesses and slower activity. Sovereign ratings have generally been stable in recent months, although downgrades continue to outweigh upgrades, mirroring political instability, country specific risks or sensitivity to global developments
Retail sales growth diverges across high-income and developing countries. Improving labor markets, easing of lending conditions and rising consumer confidence are providing support to a pick-up in retail sales in both the Euro Area (0.5 ppt in February) and the United States (1.1 ppt in March following the severe winter-induced contraction in February). The front-loading of purchases in advance of the tax hike supported the buoyant (even if decelerating) February retail sales growth in Japan. In contrast, slowing domestic demand conditions weighed on retail sales growth in developing countries. This was most evident in China, where weakening activity, calendar effects and tighter credit conditions contributed to weaker sales (from 6.9% in January to 1.9% in February). Elsewhere, rising inflation, reduced access to credit, declining confidence and, among commodity exporting countries such as Brazil, income pressure from lower commodity prices were among the likely drivers of softer retail sales. Looking ahead, the effect of slower consumer demand on developing country growth is expected to be offset by stronger exports to high-income countries.
Private indebtedness continued to rise among key developing economies in 2013Q3, despite tighter credit conditions. During the post-crisis period, low financing costs and very loose domestic monetary policies translated into rapid increases in private indebtedness across developing countries, particularly in East Asia. In China, Malaysia and Thailand, private debt reached record high levels in 2013Q3, amounting respectively to 186, 133 and 123 percent of GDP. The stock of private debt in China mainly derives from past credit to non-financial corporations (accounting for more than 80 percent of the total stock), which contrasts with countries such as Thailand or Mexico where household debt represents the largest share. Leverage continued to increase in Brazil and Turkey in 2013Q3, as well as in Indonesia, but from a lower level. Increased indebtedness over time partly reflects deepening capital markets and growing banking sector intermediation, but also past excesses of credit-fueled growth and weakening activity more recently. Tighter lending standards and higher costs of funding should eventually translate in a stabilization of leverage ratios and weaker domestic demand in countries where imbalances have built up over the years. Such process is already at play early in 2014, and form part of the necessary transition towards more sustainable growth and reduced risks of financial instability.

Sovereign ratings are broadly stable across most developing regions, with downgrades in Ukraine, Latin America and Africa as notable exceptions. 13 downgrades of developing-country sovereign debt have been announced by credit-rating agencies since the start of the year, versus only 3 upgrades. Five of the downgrades concerned the Ukraine, with other downgrades concentrated in Latin America (Argentina, Brazil, Honduras, and Venezuela) and Sub-Saharan Africa (Cape Verde, Mozambique, and Uganda). Downgrades were provoked by rising concerns about slower activity, deteriorating public finances, reduced ability to service external debt and political instability. However, most developing countries currently retain a stable rating outlook. On the other hand, the creditworthiness of high-income countries seem to be improving in line with their gradual economic recovery, with Ireland and Spain for instance receiving upgrades after years of negative growth and demanding fiscal adjustments. Russia has seen its rating downgraded this week reflecting weak fundamentals and escalating tensions with the Ukraine.

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