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Prospects Weekly: The robust recovery in gross capital flows that began in the second half of 2013 resumed in March, Global business sentiment improved in March despite concerns around Ukraine, Import demand is strengthening across developing regions

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After faltering in February, the robust recovery in gross capital flows that began in the second half of 2013 resumed in March. Global business sentiment improved in March despite concerns around Ukraine and slowing growth in China. Consistent with these trends, import demand is strengthening across developing regions, albeit with variations.
The robust recovery in gross capital flows that started in the second half of 2013 resumed in March following a sharp decline in February. Gross capital flows to developing countries have averaged $45 billion/month since September 2013 (compared with $31 billion/month in the June-August period), reflecting still very loose monetary policy conditions in high-income countries – notwithstanding the gradual withdrawal of FED’s quantitative easing that was initiated in January. Gross capital flows continue to remain sensitive to global developments as witnessed by the sharp dip to $17.2 billion in February caused by turmoil in emerging financial markets. In March, however they bounced back to $52.9 billion. Bond financing (including a large deal by Brazil’s oil giant Petrobras) bounced back on reduced risk aversion and still subdued borrowing costs. Bank lending also recovered strongly, most notably in Malaysia and Thailand. Equity issuance rose in March, with strong flows to China (partly due to strong IPO activity), and to India and Colombia. In parallel, developing-country local stock markets rose 7% in the second half of March, supported by cheaper valuations relative to high-income stocks, and improving market sentiment.
Notwithstanding recent tensions in Ukraine, business sentiment continues to improve globally in line with improving growth prospects. Surveys of purchasing managers indicate a robust pace of expansion in the developed economies. The Euro Area manufacturing index rose in March and is close to its highest levels in nearly three years, while the US ISM index continued its rebound from a weather-induced dip in January. Firming new orders and export orders suggest further gains ahead. In Japan, business sentiment has weakened in advance of this month’s sales tax increase from 5% to 8%, suggesting that activity in Japan will decelerate. Business sentiment in China eased in recent months in line with a softening of the economy. Indeed, China’s indicator of new orders is at its lowest level in 28 months. In other developing countries, business sentiment is still robust but remains heterogeneous (broadly stable in Brazil and Mexico; increasing in South Africa, and weaker in India, Indonesia and Turkey --partly due to tighter monetary policy).

Developing-country imports are strengthening. Developing country import volume growth has rebounded strongly in recent months, settling at an above trend growth rate of between 12 and 13 percent (3m/3m, saar) in both January and February. This pick-up in import demand has been broadly-based among developing economies where data are available. The rebound is strongest in the East Asia & Pacific and Europe & Central Asia regions, where the double digit expansion in imports is being supported by strengthening economic activity (both industrial production and export growth have remained robust). Import growth has also picked-up in South Asia and Latin America despite declines in industrial production and export growth during recent months. Given that both regions, unlike others, endured a contraction in import demand in Q4 2013 (in part due to earlier policy tightening and sharp exchange rate depreciations in some of the largest economies in the respective regions), the recent increase may reflect a cyclical rebuilding of inventories as business sentiment improves.

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