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Developing Trend of Global Economies by World Bank July 2013

Developing Trend of Global Economies by World Bank July 2013

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Published by Priyen Savla
Developing Trend of Global Economies by World Bank
Developing Trend of Global Economies by World Bank

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Published by: Priyen Savla on Aug 01, 2013
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Developing Trends: July 2013
Overview
Developing Trends
was prepared by the Development Economics Prospects Group (DECPG) of the World Bank. The team is coordinated by AllenDennis (Overview and Trade), and is comprised of Tehmina Khan (High-Income), Cristina Savescu (Industrial Production and Business sentiment),Eung Ju Kim (High-income and Finance), John Baffes and Damir Cosic (Commodities), and Sanket Mohapatra (Exchange rate) EkaterineVashakmadze (Inflation), and Adil Islam (Statistical Annex). The report was prepared under the guidance of Andrew Burns.
This note reflects the views of the team, but is not formally cleared by the World Bank Group.
Triggered by recent Fed statements, global financial markets have been rattled as investors re-calibrateexpectations.
 Between late May and early July, there was a wide-spread sell-off in global financial mar-kets, following a Fed testimony to the US congress, interpreted by investors to suggest that the US QEprogram could be tapered off earlier than previously thought. During this period, the 10-year yield on UStreasuries rose more than 60 basis points (bps) to 2.739% on July 5, the highest level since August 2011.Benchmark stock indexes in the United States, Japan, and Europe fell by 5.2, 9.3, and 8.5 percent, respec-tively, and CDS spreads for high-spread Euro Area economies also rose (in the case of the Portugal thesharp rise had more to do with political grid lock). Bond issuance from emerging market economies tum-bled to a mere $1.7 billion in June, compared to $37.7 billion in May and a record $44.9 billion in April.Further, metal prices, in particular precious metals tumbled during this period (12% decline). However,since early July there has been a partial reversal of these trends as another statement by the Fed appearsto have tempered previous market expectations of an early QE tapering. As a result, since the first week ofJuly US treasury yields have declined by about 15 bps, US stock markets have bounced back hitting recordhighs. However, reflecting domestic challenges in some large developing countries (slower growth in Chi-na, Brazil and India) the bounce back in developing country stock markets has been less pronounced.
With real side data lagging behind financial indicators, the real side impacts of recent perturbations infinancial markets is yet to be determined, nonetheless global industrial activity has been deceleratingsince March with diverging performances across economies.
Global industrial production growth deceler-ated to an annualized pace of 2.3 percent (3m/3m, saar) in the three months to May from 2.8 and 2.5percent in April and March respectively. Nonetheless, performance across economies have diverged, withindustrial production growth in high-income countries actually strengthening, albeit from weak levels (i.e.from 1.2% in March to 2.2% in May), in contrast with the weakening of activity among developing econo-mies (from 5.3% in March to 2.4% in May). High-income countries industrial expansion was buoyed by a
-8.0-6.0-4.0-2.00.02.04.06.08.010.012.014.0
Jan-11May-11Sep-11Jan-12May-12Sep-12Jan-13May-13
High-IncomeDevelopingWorld
Pace of industrial production growth diverges betweendeveloping and high-income countries
(volumes, %ch 3m/3m)
Source:
 
World
 
Bank
 
DEC
 
Prospects
 
Group
 
and
 
Datastream
 
15
55152535455565
U.S.
 
stocks(S&P
 
500)Germanstocks
 
(DAX)Japan(TOPIX)EM
 
stocks US
 
TreasuryyieldHigh
spreadEuro
 
CDSspread
Between
 
late
 
May
 
and
 
June July
Global financial markets have been volatile in recent months
Change (
 percen
t,
basis points
)
Source: Bloombergand World Bank DECProspects Group
1
 
April 24, 2013
Developing Trends: May 2013
German-led acceleration in Euro Area industrial output (3.5% in May – strongest expansion in 27 months); aswell as in Japan (7.0% in May – strongest expansion in 20 months) where ongoing stimulus measures and thesharp yen depreciation have supported a strong rebound in real-side activity. Purchasing Manager Indices(PMI) on output in June, suggest that the divergence in economic performance observed across economies inMay continued in June. However, the new orders PMIs present a mixed picture for prospects going forward.On the one hand, new orders were up for Japan and the United States, suggesting strengthening activity forthe early months of Q3 2013. On the other hand, weaker new orders PMI in the Euro Area signals a temperingof the recent expansion. Among developing economies, June new orders PMI signal weakening activity forChina, India, and Vietnam, and a marginal pick-up in orders for Indonesia, Brazil, Russia and Turkey.
Commodity prices projected to decline in 2013.
The recently released World Bank Commodity Markets Out-look forecasts oil prices to average $101/bbl in 2013, down from $105/bbl in 2012, barring any major macro-economic shocks or supply disruptions. Agricultural prices are projected to decline 6 percent in 2013, underthe assumption of a normal crop. However, sharper price declines are expected in metals and minerals: withbase metal prices projected to fall by more than 8 percent due to abundant supplies and weakening demandconditions; and precious metals prices are expected to drop almost 20 percent as institutional investors in-creasingly consider them less attractive “safe haven” alternatives. Nonetheless, there are several risks to thisoutlook. For oil prices, downside risks include weaker than expected global growth, while upside risks couldresult from oil supply disruptions in the Middle East. For metal prices, down side risks stem from the speed atwhich new supply comes on stream, the degree of slowdown in China (which accounts for 45% of global metalconsumption) and US monetary policy. Weather-related shocks are the key upside risks for agricultural prices.
Inflationary pressures remain low globally.
Declining commodity prices and subdued global demand havecontributed to easing price pressures. Global inflation eased to a 2.1 percent annualized pace (saar) in thethree months to May, 1 percentage points slower compared to May 2012. High-income country inflationdropped to a 0.4 percent pace (saar) in the three months to May - the lowest rate since April 2009-, and infla-tion in developing countries fell to 6.2 percent in June - the lowest rate since September 2012. Notwithstand-ing the low global inflation environment, idiosyncratic domestic factors have contributed to inflationary pres-sures in some regions. The Middle East & North Africa continues to see high inflation rates related to supplydisruptions due to political turmoil, sanctions and currency depreciation. In South Asia, inflationary pressureshave built-up due to supply-side bottlenecks and currency depreciations in a number of Latin American coun-tries have increased inflation momentum there. In general, developing-country central banks have paused oneasing of policy rates. With many developing economies operating at or close to full capacity, further policyeasing would likely contribute to an escalation of debt and asset bubbles without much payoff in growth.
0.01.02.03.04.05.06.07.08.09.010.0
Jan-11May-11Sep-11Jan-12May-12Sep-12Jan-13May-13
DevelopingHigh-incomeWorld
Inflation is decelerating globally
(CPI, %ch 3m/3m saar)
120140160180200220240Jan-10Jun-10Nov-10Apr-11Sep-11Feb-12Jul-12Dec-12May-13 AgricultureEnergyMetal and Minerals
Commodity Prices have sustained a downward trend in recent months
($US nominal 2005=100)
2
 
July 18, 2013
High income (1)
US data are mixed, with industrial productiongrowth easing, but consumer confidence andlabor markets continue to mend.
 

Final Q1 GDP estimates were revised down to1.8% growth (q/q saar) from 2.4% initially esti-mated due to weaker consumer and businessspending. IP growth eased to 1.6% (3m/3msaar) in May from 2.9%, with the June manufac-turing PMI also signaling slower output growth.

On the plus side, the Conference Board consum-er confidence index rose 7.1 points to 81.4 inJune, the highest in nearly 6 years, while laborand housing markets continue to mend.

Equities which had fallen in June due to uncer-tainty about the tapering of quantitative easingpolicies have reached new highs on reassuranceby the Federal Reserve that currently loose mon-etary policy would be maintained for some time.
Euro Area data indicate an easing in the down-turn, although fiscal consolidation and tightcredit conditions in the periphery remain a drag
 

Euro Area IP growth gained momentum rising by3.5% (3m/3m saar) in May, up from 2.9% in April.The improvement was led by a strong accelera-tion in Germany’s IP growth to 9.1% (from 6.2%)but also in other Euro Area economies. Germanfactory orders, a gauge of future investmentspending continued to grow at a strong pace.
 

However the June manufacturing PMI fell in Ger-many to 48.6, the second consecutive monthly fallon renewed weakness in new orders and declinesin employment.

Although PMIs rose in other EU countries, theindex has risen to or above the 50 line separatinggrowth from contraction only in Ireland (50.3)and Spain (50.0). In addition, unemploymentcontinues to increase while credit remains tightand house prices continue to fall.
Activity remained strong in Japan supported byaggressive monetary easing.

Industrial activity and consumer spending re-mained strong. IP rose by 7.1% (3m/3m saar) inMay from 5.2% in April. Retail sales rose by 1.9%(3m/3m saar) down from 3.1% in April.

Manufacturing PMIs point to faster expansion inoutput. Meanwhile consumer confidence is at aseven year high with 80% of Bank of Japan surveyrespondents expecting higher inflation in a year.
Data show the US economy continuing to heal, with retail spending gaining momentum and consumer confi-dence rising strongly, although industrial output growth and business confidence are weak. Euro Area IP ac-celerated in May led by Germany as well as a recovery in the troubled periphery economies. Forward lookingmanufacturing PMIs Improved for all except Germany. Industrial output and consumer spending gained fur-ther momentum in Japan in line with rising business and consumer sentiment with the latter at a 7-year high.
40444852566064Jan-10Apr-10Jul-10Oct-10Jan-11Apr-11Jul-11Oct-11Jan-12Apr-12Jul-12Oct-12Jan-13Apr-13Jul-13
Euro AreaUSAJapanGermanyItaly50-line
Manufacturing purchasing managers index (PMI)
Diffusion Index 
Source: World Bank Prospects Group and MarkitLast updated: Jul. 17, 2013
-20-15-10-50510152025May-11 Nov-11 May-12 Nov-12 May-13
HIY retail sales
Volume, 3mma saar % chg
US Japan Germany EMU
-30-20-100102030405060May-11Aug-11Nov-11Feb-12May-12Aug-12Nov-12Feb-13May-13Jap: Core orders ex ships, utilitiesUSA: New orders durable goods ex transportGer: Total new orders
HIY Machinery Orders
(3m/3m saar % chg)
3

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