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Prospects Weekly: U.S. employment growth returns to positive, capital flows to EMs almost doubled, external financing gaps fall

Global Macroeconomics Team's picture
A return to growth in capital spending and employment in the U.S. provides further evidence of a revival in  private sector activity. Strong gains in corporate profits and rising capital goods orders point to a firming of investment growth in the months ahead. Capital flows to emerging markets surged in Q1-2010, led by bonds and equities. But, overall capital flows are down from 2008 and 2007 because of very weak bank lending. Given the recovery in capital inflows—combined with sharp current account adjustment in 2009—external financing gaps of developing countries are projected to decline in 2010 and 2011, but remain significant as a share of GDP for low-income countries reliant on ODA.

U.S. capital spending and employment return to positive growth rates. After  declining a cumulative 22% since 2008-Q3, business fixed investment expanded at a 5.3% annualized pace in Q4-2009 (q/q, saar) (equipment and software jumped 19%). Corporate profits surged $137 billion in the quarter (y/y). Early data suggest that these trends continued in Q1-2010. Capital goods orders advanced 16% over the 3-months ending February 2010. Mirroring these developments, employment increased 162,000 in March 2010 (having fallen a cumulative 8.5 million in the past two years). While job creation is expected to accelerate in the months ahead, it will take years to restore pre-crisis levels of employment. 

Gross capital flows to emerging markets in the first quarter of 2010 nearly doubled to $94 billion, as bond and equity flows surged. Emerging-market sovereign- and corporate borrowers are issuing bonds at a near-record pace—$46 billion in the first quarter of 2010—to take advantage of current low borrowing costs. Over 2010 to date, sovereign borrowers issued about $22 billion and corporates $26 billion, with the latter weighed heavily toward Latin America(Brazil and Mexico). Total flows remain 43% lower than in 2007 and 9% lower than in 2008, as bank lending remains sharply compressed. 

External financing gaps will decline in 2010 and 2011, but remain large. The decline reflects both improved capital conditions and reduced financing needs. Financing needs are expected to decline from $1.2tn in 2009 to 1.1tn in both 2010 and 2011, mainly because of smaller current account deficits due to forced spending cuts in 2009. Private sector financial flows are expected to rise from $442bn in 2009 to $745bn in 2010, largely reflecting stronger FDI and bond flows. As a result, the ex-ante financing gap is projected to decline to $210bn in 2010 from $350bn in 2009. As a share of GDP, the decline in the gap was most marked for upper-middle-income countries (1.5%) and (1.3%) lower-middle income countries. For LICs—given still-depressed bank-lending and limited access to bond markets—financing the projected gap of 6.5% of GDP in 2010 will prove challenging, especially if ODA flows decline. 

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