The External Environment for Developing Countries

Transcription

1 The External Environment for Developing Countries Overview April 21 Developments on the real side of the global economy have been favorable in the last months, evidenced in a notable shift toward stronger domestic demand. Business investment is picking up in the United States and Japan, an important sign that private sector activity is finding stronger footing. U.S. consumer spending increased in each of the 5 months through March, while retail volumes in China and the East Asia region continue growing robustly. Data out of Europe is mixed, with indications of stagnation in exports; but measures of business and consumer sentiment have breached pre-crisis highs in the last month. Equity and commodity markets are echoing the pickup in activity. Euro-Group approves Greek financial package. Euro-Zone Finance Ministers announced details of a financial plan for Greece on April 11. As much as 3 billion in three-year loans would be offered Greece at 5% during 21. And 15 billion would also come from the IMF. Following the news, Greece s 3-year Equity and commodity markets echo the pickup in global economic activity Dow-Jones Industrial average [left]; Copper price ($/ton) [right] 14, 13, 12, 11, 1, 9, 8, 7, 6, Jan-8 Jun-8 Nov-8 Apr-9 Sep-9 Feb-1 Source: Thomson-Datastream Copper price [right] Dow Jones [left] 9, 8, 7, 6, 5, 4, 3, 2, Greek CDS spread drops sharply in the wake of Euro-Group/IMF financial package 5 1/9/29 4/9/29 7/9/29 1/9/29 1/9/21 4/9/21 Source: Bloomberg. bond yields dropped 9 basis points to 6.18%; CDS spreads fell 6 basis points and the euro gained 1.4% against the dollar to $ Uncertainty persists, however, with a warning from Moody s about another potential downgrade for the country. In other financial developments, long term yields in the United States are rising, a development which seems to reflect concerns about the long-term sustainability of U.S. government debt and the country s reliance on foreign markets for its financing. Capital flows to emerging market surged to $44 billion in March on strong bond issuance. Developing-country borrowers sold $48 billion of new bonds in the first quarter of 21, half of which by corporate. This was the second-best start to a year on record. Risk premiums, which have been falling since March 29,have narrowed further this year. In commodity markets, demand pressures are increasingly evident across commodity groups, with metals up 7% in March (m/m) on improving conditions outside of China. U.S. oil demand increased 1.9% (y/y) in the 4-week period ending April 2, with gasoline increasing 1.7%. Of note, U.S. consumption of commercial transport fuel (truck-diesel) is bottoming out after 2 years of substantial decline further evidence of stronger rates of activity in the country CDS Spread (basis points) This brief was prepared by the Development Economics Prospects Group (DECPG) with colleagues from PRMTR, ECA (Moscow), EAP (Beijing) and IFC (Risk/Economics). The team is comprised of Elliot (Mick) Riordan (OECD, currencies), Jean -Pierre Chauffour, Stacey Chow, Mariem Malouche and Nadia Spivak (trade), Shane Streifel (commodities), Eung Ju Kim (finance), Cristina Savescu (IP) and Sabah Mirza (Annex). Louis Kuijs (EAP) provided a review of China, and Dilek Aykut authored the Focus section this month. Mick Riordan coordinated the production of this report, with overall guidance from Andrew Burns. This note reflects the views of the team, but is not formally cleared by the World Bank Group.

2 Global Indicators (Percentage change per annum, unless otherwise specified) e 21f GDP volume: World Memo item: World GDP at PPP weights High-income countries Developing countries Industrial production: World High-income countries Developing countries Export volume (GNFS): World High-income countries Developing countries Trade Prices ($): Manufacturing (MUV) Oil ($/bbl) Non-oil commodities Nominal interest rates: $LIBOR (6m percent p.a.) LIBOR (6m percent p.a.) Financial flows FDI ($billion) Gross Capital flows a ($billion) Equity placement ($bn) Bond financing ($bn) Lending ($bn) Source: DECPG, April 21. Estimates and projections for 29 and 21 based on GEP-21, released January 21, 21, and recent (preliminary) updates. Note: a. Gross inflows 21 based on preliminary year-to-date figures. Figures in bold represent changes this month. April 15, 21 page 2

3 OECD developments Common factors across OECD centers in the last month have been a return of several benchmark equity indices to pre-crisis-levels and renewed pickup in economic sentiment. The U.S. economy is finding firmer footing for private sector revival. But housing, burgeoning Treasury auctions and associated higher long-term and market interest rates could act to dampen activity. ISM surveys show step-up in U.S. services U.S. business investment and employment turn the corner to growth bus. investment, ch% (q/q) saar [left]; change in employment [right] headline activity indexes, mfgr and services 5 marks growth/contraction threshold 3 Jan-8 May-8 Sep-8 Jan-9 May-9 Sep-9 Jan-1 Source: Institute for Supply Management (ISM). Investment [left] Employment [right] Q1 2 Q3 22 Q1 25 Q3 27 Q1 21 Source: U.S. Departments of Commerce and Labor. Mfgr Services U.S. housing hit by a wave of foreclosures Home sales, ch% 3mma y/y Total sales New home sales Existing home sales 1/1/27 7/1/27 1/1/28 7/1/28 1/1/29 7/1/29 1/1/21 Source: U.S. Department of Commerce and National Association of Realtors. Recovery in services. Manufacturing has led the recovery in U.S. growth over the last half year. Factory production rebounded to a 7.8% (saar) pace by March, finding support in widespread inventory replenishment. The Institute for Supply Management s (ISM) headline index for manufacturing in March (59.6) signals the fastest expansion since July 24. But, accounting for some 83% of U.S. employment, services activity has lagged factory output since the spring of 29. March ISM readings for services (55.4 from 53 in February) are encouraging: activity increased in 14 of 18 service sectors; orders lofted from 55 to 62.3, and hiring intentions moved up to 49.8, break point between job growth and job cuts. U.S. capital spending and jobs. An important sign that private sector activity in the United States is finding firmer footing, is the recent return to growth of both business investment and employment a relationship that has held strongly over the past 2 years. Business investment increased at a 5.3% annualized rate in the final quarter of 29 (saar), making a small dent in the cumulative decline of 22% since the onset of crisis. Corporate profits surged $137 billion in the quarter (y/y). Capital goods orders increased for a third month in February. These trends appear to be continuing, and mirroring these, employment growth turned positive, with gains of 16, in March 21. Seasonal factors are at play here, but the reluctance of employers to add to payrolls is easing, as order books firm on the back of exports and strong domestic demand. Headwinds in housing. Foreclosures above 3, for an 11 th month in February are carrying substantial negative effects on the U.S. housing market. Distressed properties now account for 35% of existing home sales, as buyers are attracted by low prices. Expectations that more such properties will flood the market are depressing overall price levels. After encouraging performance in late 29 (up 25% in December (y/y)), existing home sales fell for a third month in February 21, with little demand stimulated by the extension of the Federal tax credit to April. New home sales also show signs of stress (down 8.5% (y/y)), in part related to tightened credit criteria among mortgage lenders and expectations of higher long term interest rates to come. April 15, 21 page 3

4 Greece s sovereign debt problems have improved in the immediate term with the Euro-Group/IMF financial package. But more must be done on achieving the country s fiscal targets. In Japan, deflation persists despite an upturn in the real economy, as BOJ liquidity has done little to boost bank lending or nominal growth. And European sentiment is rising although other economic indicators paint a picture of continuing stagnation. Greek CDS spread drops sharply in the wake of Euro-Group/IMF financial package /9/29 4/9/29 7/9/29 1/9/29 1/9/21 4/9/21 Source: Bloomberg. CDS Spread (basis points) Japanese prices still falling despite pickup in economic activity consumer and producer prices, GDP deflator and Industrial Production ch% (y/y) Industrial production -1 CPI -15 PPI GDP deflator -2 Jan-8 May-8 Sep-8 Jan-9 May-9 Sep-9 Jan-1 Source: Japan Cabinet Office, METI. European sentiment steps up with little evidence for growth IFO (overall), Bank du France (business climate) [left]; German export volumes,ch% saar [right] IFO Bank du France German exports [right] 6 Jan-8 May-8 Sep-8 Jan-9 May-9 Sep-9 Jan-1 Source: IFO, Bank du France and Bundesbank Euro-Group finance ministers approve Greek package. Euro-Zone Finance Ministers announced details of a financial plan for Greece on April 11. As much as 3 billion in three-year loans would be offered Greece at 5% during 21. And 15 billion would also come from the IMF. Following the news, Greece s 3-year bond yields plummeted 9 basis points to 6.18%, CDS spreads fell 6 basis points, while the euro gained 1.4% vis-à-vis the dollar to $ Whether in fact Greece will need to tap the offer to make near-term debt rollovers and cover anticipated deficits for the remainder of the year will, according to the Greek Finance Ministry, depend on the response of bond markets. With the package in place, the burden of proof now shifts to the Greek government to deliver on its fiscal targets. Japanese deflation persists. The Japanese real-side outlook has brightened in recent months, with GDP gains of 4.6% in the final quarter of 29 (saar), falling unemployment and improved exports and production. But deflation remains stubborn. CPI and the wholesale pipeline remain in negative territory (Tokyo CPI standing 1.8% below year-earlier levels in February; producer prices off 2.1%). And the GDP deflator dropped 1 percent in 29. The Bank of Japan (BOJ) has fed massive amounts of liquidity into the economy to spur bank lending (and nominal growth) but to date this has not worked well, as banks are reluctant to lend. Nonetheless, the credit program was doubled in March to 2 trillion ($212 billion), after the Finance Ministry led calls for BOJ to do more to spur prices. Weakness in Euro Area. Indicators released in the last month underscore that the stagnation of the final quarter of 29 is continuing into the first months of 21. German exports plummeted from annualized growth of 5% (saar) in November to 25% decline as of February 21. Euro Area retail volumes fell for a second month in February, and the unemployment rate increased to 1% of the labor force in the month a 4 year high. Industrial production has flattened in the Big-3 countries, as factory orders falter; the momentum of German output fell-back to negative ground in February (decline of 3%, saar). Despite these developments, sentiment indicators for business and the consumer continue to rise with IFO and Bank du France business climate indicators reaching highest levels since mid-27. April 15, 21 page 4

5 Country Focus: China China s GDP growth during the recession was supported at high rates by government-led investment stimulus as well as large doses of liquidity. Exports have been buoyant, though the tight trade links within East Asia mean that China s exports reflect the end result of a long chain of production. EAP s Beijing office expects 9.5% GDP growth for 21 off to a promising start with an 11.9% y/y advance in the first quarter of 21. China s growth remains robust into 21 Real growth (percent) Source: World Bank GDP (yoy) Industrial value added (yoy) Jan-Feb average Net external trade subtracted heavily from growth in Source: World Bank Contribution to growth (real, percent y-o-y) GDP Domestic demand contribution of net exports China s exports have recovered impressively Index, constant prices (October 28 = 1) China's exports of goods (sa) World imports, excluding China (sa) Stimulus measures maintained China s growth during the global recession. GDP grew 8.7% in 29, led by a massive investment-led stimulus that showed up partly as an increase in the official fiscal deficit. The deficit moved from.4% of GDP in 28 to 2.8% of GDP in 29, but much financial stimulus was forthcoming through a surge in bank lending by almost 3% of GDP. Government-led investment was the key driver for growth for much of 29. Real estate investment gained prominence more recently. Household consumption growth has remained solid throughout, largely because the labor market held up well. And overall employment and wage growth remained positive in the first half of 29, picking up again around midyear. After a sharp fall, exports recovered briskly and now exceed pre-crisis levels. Because of their steep initial decline, exports dropped by about 1% in real terms for 29 as a whole. Imports held up much better than exports, especially non-processing imports used in the domestic economy. Because of the larger increase in imports, net external trade was a major drag on growth in 29, subtracting 3.9 percentage points from GDP growth. The current account surplus declined from 9.4% of GDP in 28 to 5.8% in 29. However, as the global economy improved, exports staged an impressive recovery. This rebound has continued into 21, and in the first quarter of this year exports exceeded 28 levels. Growth is likely to remain strong this year, with the composition of growth set to shift markedly. Strong growth momentum carried into the first months of 21. In addition to robust exports, retail sales and industrial production also posted rapid gains. Affected by a low base level in the year-earlier quarter, GDP grew a full 11.9% in the first quarter of 21 (y/y). EAP s Beijing Office projects real GDP growth of 9.5% for 21 as a whole. Exports are on course to grow rapidly as global demand recovers. And though imports should outpace exports somewhat, net external trade should add modestly to real GDP growth. Real investment growth, however, may register half of the last year s advance. In a heated housing market, real estate investment should grow strongly. But government-led investment, the key driver of growth in 29, is bound to decelerate sharply. Source: World Bank April 15, 21 page 5

6 Despite rapid growth in domestic demand consumer spending and housing investment inflation is anticipated to remain moderate, but with a risk of bubble formation in the housing sector. China s balance on goods trade moved to deficit in March 21; but this is anticipated to be short-lived. Chinese authorities are moving on the policy front to reign-in growth, without putting a complete damper on activity. EAP Beijing suggests tighter monetary policy, with flexibility on the fiscal side. The composition of growth is likely to change substantially this year Source: World Bank China s cyclical condition differs sharply from that in the United States Contribution to growth (real, percent y-o-y) GDP Domestic demand Net exports The external surplus is likely past its peak Source: World Bank Share of GDP (percent) Percent Current account Trade balance US output gap China's output gap Inflation is likely to remain modest, but rapid property price increases are a risk. Consumer prices picked up in the second half of 29, predominantly because of higher food costs. In spite of the massive monetary expansion, inflation will likely remain modest in 21, as global price pressures remain subdued and the China-specific factors behind food price increases abate. However, property prices in the large cities were on average more than 3% higher than a year ago in February, and further increases are in sight. The trade surplus may edge down in 21, in U.S. dollar terms, because of an anticipated decline in the terms of trade. However, the trade deficit in March is unlikely to herald a sustained deficit and the current account surplus may actually increase somewhat in 21 in dollar terms. China needs a less accommodative macroeconomic policy stance than other countries to contain emerging risks. China s growth has been strong and, unlike most other countries, China s overall output is close to potential. Even though inflation risks remain modest because of the global context, the macro stance needs to be tighter than in 29 to contain the key macroeconomic risks: a property bubble and strained local government finances. On the property market, stability calls for an appropriate macro stance and better functioning of markets. Concerns about the affordability of housing for lower-income people would be best addressed by a long term government support framework. Macro policies are being adjusted gradually. The budget presented to the NPC rightly implies a broadly neutral fiscal stance. The 21 deficit is targeted to remain little changed compared to 29. Flexibility in its implementation calls for contingency plans and letting automatic stabilizers work. Monetary policy needs to be tighter than in 29. The monetary data for the first quarter of 21 indicates some success in reining in credit growth. Strengthening the exchange rate can help reduce inflationary pressures and rebalance the economy, while the case for a larger role for interest rates in monetary policy is strong. If policymakers remain concerned about interest rate sensitive capital flows, more exchange rate flexibility would help. Source: World Bank April 15, 21 page 6

7 Industrial Production Industrial output continues to expand at a robust pace globally, broadening across countries and sectors. Strong domestic demand in selected developing countries together with a rebound in world trade have supported output, and prompted manufacturing companies to rebuild inventories. Production across developing regions remains generally buoyant, but has become more differentiated in the first months of 21. Global industrial production continues to expand at a rate near 1% global industrial production, ch% (3m/3m, saar) Jan-4 Oct-4 Jul-5 Apr-6 Jan-7 Oct-7 Jul-8 Apr-9 Jan-1 Source: World Bank calculations based on Thomson Datastream data Pace of recovey in production mixed across developing regions Source: World Bank data industrial production, ch% (3m/3m saar) Latin America Europe and Central Asia East Asia and Pacific South Asia Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Growth in retail sales picking up but volumes yet to breach pre-crisis levels global retail sales proxy, (excl United States), ch% (y/y) Jan-4 Oct-4 Jul-5 Apr-6 Jan-7 Oct-7 Jul-8 Apr-9 Jan-1 Industrial output recovery continues. Global production growth continued to expand at a 1% annualized rate in February, as momentum in highincome countries stepped up to 9.3%, while in developing countries, output growth remained above 1%. March business surveys indicate that sentiment is for stronger orders growth going forward, with a broadening across both sectors and regions. The global PMI manufacturing output index partly retraced its February falloff, increasing to 58.8 in March. New orders and inventories gained 1.8 and 2.6 points, increasing to 58.7 and 51.4 respectively, with the latter breaching an historic high. A stepup in the employment index to 52 suggests that hiring intentions are heating up, which if realized will help support household spending. Mixed production outturns across regions. IP momentum in developing East Asia and Pacific and South Asia re-accelerated to strong double-digit rates in early 21. At the same time, growth in Latin America, and Europe and Central Asia eased to below 1% gains (saar). Momentum in the economies at the forefront of recovery, and considered bellwethers for the global economy, such as South Korea and Taiwan (China), also remained strong through February, sending more encouraging signals about the tenor of recovery thus far. Strong domestic demand in developing countries. A proxy for global retail sales points to recovery in private consumption at the world level, with annual sales volume gaining for a fifth consecutive month. Demand in selected developing countries, bolstered by fiscal stimulus has been particularly robust. China s retail sales value grew at a 3% rate in the three months to February (saar), and assuming consumer price inflation in the vicinity of 3%, retail volumes are growing at a rate close to 25%. Other countries such as Brazil are also seeing strong domestic demand. But anticipated withdrawal of policy stimulus in the months ahead may serve to weaken domestic demand growth, with country-specific elements coming to the fore. Source: DEC Prospects Group calculations April 15, 21 page 7

8 International Trade A recently released World Trade Organization report projects global trade volumes to grow 9.5% in 21. Led by Asia, developing country volumes are already back to pre-crisis levels. Global imbalances are narrowing. China now the tops the world exporters list, and its share in the U.S. trade deficit is growing, Improved trade logistics are facilitating the cross border movement of goods in increasingly integrated regions China s share in U.S. trade deficit in part a reflection of East Asia s production chain Developing country trade increased above pre-crisis peaks as of early 21 Source: World Bank, DEC Prospects Group share of selected countries in U.S. trade deficit Other Asia Japan. Mexico Source: U.S. ITC data and World Bank calculations China LPI 21 performance varies around the world Logistics unfriendly Partial performers Consistent performers Logistics friendly export and import volumes, billions USD 27M1 27M6 27M11 28M4 28M9 29M2 29M7 29M12 Developing imports High income imports Developing countries High income countries Developing exports High income exports No data Source: Connecting to Compete, World Bank, 21 Developing country trade volumes back to pre -crisis levels. The World Trade Organization s report released in March projects world goods trade volumes to grow 9.5% in 21 after a record 12% decline in 29. At that projected pace, global trade should recover to pre-crisis levels by the end of 21. Developing countries have already surpassed their 28 peak levels, after posting strong growth in January and February 21. In contrast, import and export volumes of high income countries have not fully recovered, standing some 2% and 14% below 28 peaks respectively. Narrowing of imbalances. China just reported its first monthly trade deficit since 24, reducing its trade surplus to $8.5 billion in the first quarter of 21 from $21 billion a year ago. But this deficit is likely to be temporary, based on months of stimulus-generated imports and strong export growth in 29 (with China surpassing Germany as the world s top exporter). China s bilateral surplus with the United States reflects tight integration of East Asian trade, with China the last stage in the supply chain and- hence the final exporter to the U.S. market. Overall Asia s share in the U.S. trade deficit has been fairly stable since 199. Though China s share in the U.S. deficit has been rising over the last 2 decades, this is partly a statistical artifact. Efficient trade logistics is key to facilitate cross border goods movements. The World Bank s 21 Logistics Performance Indicators (LPI) indicate that, for countries broadly at the same level of per-capita income, logistically friendly countries are more likely to have better global value chain integration and attract more export-oriented industries. Logistics overachievers countries with a higher LPI score than income would predict experience 2% more trade expansion, 1% more annual growth, or export 4% more variety of products than other countries at the same income level. It also shows that logistics overachievers are countries that have more consistently invested in comprehensive logistics reforms including efficient customs and border clearance processes, quality of logistics services, and timely and competitively priced shipments. April 15, 21 page 8

9 Commodity Prices Crude oil prices topped $85/bbl in April. U.S. oil demand growth has turned positive, with distillate demand showing signs of bottoming--suggesting the large slump in commercial transport is ending. U.S. natural gas prices remain under downward pressure due to the steady gains in newly developed unconventional shale gas production ,15 1,1 1,5 1, 95 9 U.S. petroleum inventories remain relatively high 5-year range million barrels U.S. petroleum inventories 85 Jan-3 Jan-5 Jan-7 Jan-9 Jan-11 Source: U.S. EIA. Oil prices and OPEC production $/bbl OPEC production [R scale] Oil price [L scale] 2 28 Jan-4 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Source: IEA, Bloomberg and DECPG million b/d U.S. natural gas prices remain low on unconventional production gains $/mmbtu Jan- Jan-2 Jan-4 Jan-6 Jan-8 Jan-1 Source: IEA, Bloomberg and DECPG. Oil price U.S. gas price Oil market conditions continue to tighten. Crude oil prices (World Bank average), which traded within a $7-8/bbl band for the past six months topped $85/bbl in early April. The market continues to tighten on improving demand, falling stocks, and positive macroeconomic sentiment. OPEC left production quotas unchanged at its meeting of March 17th, and the group stated it was comfortable with prevailing prices. OPEC production was little changed in March with compliance to its 4.2mb/d of production cuts sitting at 56%. What is uncertain going forward is at what price level OPEC would raise production quotas to bring prices back into its preferred range. Product inventories fall as demand recovers. U.S. petroleum inventories dropped substantially from their peaks last April. Crude oil inventories have been rising seasonally in the first quarter due to refinery maintenance, and remain at the upper end of their 5-year range. Product inventories continue to fall, particularly distillate (heating oil and diesel), in part due to earlier bouts of cold winter weather. However, distillate stocks remain well above the 5-year range due to lack of recovery to date in truck transport fuel demand. But the latest 4-week (as of April 2nd) tally for oil demand shows distillate bottoming out following two years of large declines. Total U.S. oil demand was up 1.9% (y/y) for the 4-week period, with gasoline demand increasing 1.7%. U.S. natural gas prices continue to diverge from oil. Natural gas prices in the United States have been under downward pressure due to weak demand (industrial as well as residential) and steady increases in production, mostly from the rise in unconventional shale gas output. Large shale gas reserves in many parts of the country have long been known, but through the recent combination of hydraulic fracturing and horizontal drilling, this gas has become cheaper to extract. Simultaneously, large volumes of LNG are coming on-line in Qatar and other producing countries, once to be destined for U.S. markets. Such LNG will likely have to find a home elsewhere, contributing to a growing global spot market for gas. April 15, 21 page 9

10 Agriculture prices declined for a second month on ample supply prospects, although raw materials prices continued their upward climb on higher demand and reduced supplies of cotton and rubber. Metals prices continued to surge on rising demand outside of China, though stocks and surplus capacity may limit further gains in the near term. Food-beverage prices fall but cotton & rubber prices up on supply constraints (2=1) Food Beverages Raw Materials 1 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Source: DECPG. Metals prices rise on demand expectations 9,$/ton 8, 7, 6, 5, 4, 3, 2, 1, Copper [L scale] Jan-3 Jan-5 Jan-7 Jan-9 Source: IEA, Bloomberg and DECPG Source: IISI. Aluminum [L scale] $/ton Nickel [R scale] Global steel production ( tons) Other China Other Asia Pacific 6, 5, 4, 3, 2, 1, Jan- Jan-2 Jan-4 Jan-6 Jan-8 Jan-1 Agriculture prices fall for second month. Agriculture prices dropped 1.5% in March (m/m) led by a 25% plummet in sugar prices. The steep falloff eliminated much of the last years gain, as most sugar producing countries increased plantings in response to higher prices. Soybean meal prices fell 12% on expectations of improved supply in the first half of this year, mainly from Argentina and Brazil. Cocoa, tea and rice prices each fell 6% due to improved supply conditions. Partly offsetting these declines, coconut oil and palm-kernel oil jumped more than 1% on strong import demand from China, and tight supply of palm-kernel oil. Agriculture raw materials prices increased for an 8th month, with gains of 7% in cotton and rubber due to supply shortfalls. Metals prices firm on expected demand growth. Metals and minerals prices surged 7% in March (m/m) resuming their upward climb on improving demand conditions outside of China, falling inventories, and positive macroeconomic sentiment. Nickel prices jumped 18% up nearly onethird this year due to strong demand from stainless steel producers and ongoing strikes at Vale s nickel operations in Canada. Copper prices increased 9%, testing the $8,/ton level in April, echoing concerns that mine supply growth will be insufficient in the medium term to satisfy anticipated growth in demand. Aluminum prices have been ratcheting higher on rising demand, but the industry remains in surplus. And silver prices jumped 8% on strong investment demand and recovery in industrial consumption. Steel production up in 21. Global steel production is up nearly one-third since the end of its deep slump in December 28. Recovery has been shared near equally between China and the rest of the world. China s production is up one-third over the period, and importantly, output has returned to trend growth, consistent with the strength of industrial production and trade. Its share of world production registered 47% in February. Elsewhere, steel production remains well below pre-crisis peak levels, particularly outside Asia which recorded by far the largest drop in 28-H2. But all main regions have posted notable gains, with the most rapid increases coming in North America and Europe, up 51% and 41%, respectively. April 15, 21 page 1

11 International Finance Capital flows to emerging markets were up markedly in the first quarter, led by bonds and equity. But flows remain depressed contrasted with the like periods of 27 and 28, mainly due to weak bank lending. Equity market volatility continues to ease, pointing to a revival of risk appetite; but volatility of EM debt has been range bound. Long-term U.S. Treasury yields have increased, arguably tied to the build-up of U.S. debt Capital flows to EM surged in March $ billion Q1 Total Q1 Total Jan Feb Mar Q1 Total Bonds Banks Equity Lat. America Bonds E. Europe Bonds Asia Bonds Others Source: DECPG. VIX index [left], daily change in weighted EMBIG spreads (3-day movavg)[right] Volatility of risky assets continues to ease in Feb-8 Jul-8 Dec-8 May-9 Oct-9 Mar-1 Source: JPMorgan, Bloomberg, World Bank. U.S. Treasury yields increasing European and EM bonds remain subdued U.S. Euro zone BRIC [right] 2. Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Source: Bloomberg and World Bank. Equity volatility, VIX index [L] 1-year government bonds yields (%) EM bond volatility, EMBIG [R] Robust flows to emerging markets. Capital flows amounted to $92 billion in the first quarter of 21, almost double the $48 billion in the like period of 29, as bond and equity flows surged. Flows remain, however, 43% lower than in 27 and 9% lower than in 28, as bank lending has remained subdued relative to previous years notably lending to Emerging Europe. Emerging-market borrowers are issuing bonds at a near-record pace to take advantage of current low borrowing costs. Developing-country borrowers sold $48 billion of new bonds in the first quarter of 21, posting their second-best start to a year on record, as risk premiums which have been falling since March 29 have narrowed further this year. Over 21 to date, sovereign borrowers issued about $22 billion and corporate $26 billion, weighted heavily toward Latin America. Equity market volatility compressed; EM debt range-bound. Equity market volatility continued a downtrend for much of 21, with the VIX index well off its highs of late 28/early 29, now standing at the low end of what would be considered a normal range by historical standards. Meanwhile, market volatility for EM debt has been largely range-bound; the change in EMBIG spreads stands well below last year s peak, but has escalated somewhat recently, due in large measure to volatility in U.S. Treasuries. EM sovereign spreads tightened to 242 basis points in early April, lowest since late 27, while U.S. Treasury yields increased to an intra-day high of 4%. Despite recent spread fluctuations, market sentiment has been improving, which encouraged flows to riskier assets in search of yield. Yields on U.S. 1-year notes are rising, even as yields in Europe and EM remain subdued. Long term yields in the United States are rising, but they are stable or declining in Europe and emerging markets. Euro rates are in decline, despite increased concern about Greek debt difficulties in part because of the weak economic growth outlook for the Euro Area, and expectations that the ECB will hold policy rates at current lows. U.S. yields now eclipse those in Europe, a development that seems to reflect concerns about the long-term sustainability of U.S. government finances, and the country s reliance on foreign markets for its financing. April 15, 21 page 11

12 Currencies and inflation In the wake of the announced financial package for Greece the euro recouped about half of its 5% decline against the dollar. The U.S. unit has increased fundamental support in widening interest differentials, and a full 2 point GDP growth margin versus the Euro Area for 21. Headline inflation rates are turning up, across many OECD and developing countries, but core CPI remains subdued. USD per Euro (inverse) [Left] and Yen per USD [right] Oct-9 Nov-9 Dec-9 Jan-1 Feb-1 Mar-1 Apr Source: Thomson/Datastream Euro regains some ground vs dollar on partial relaxation of Greek debt tensions Source: Thomson-Datastream yen/usd USD/Euro (inverse) Volatility in USD-Libor increases sharply with UST yields moving well above Bund USD-Libor, EURIBOR, US Treasuty 1-year yield and 1-yr Bund yield, percent USD-LIBOR UST-1-yr EURIBOR Bund1-yr. Feb-8 Jul-8 Dec-8 May-9 Oct-9 Mar Inflation picking up as the period of high commodity prices passes from calculation headline CPI indexes, ch% yr/yr USA Euro Area Japan China Developing (median) /1/27 7/1/27 1/1/28 7/1/28 1/1/29 7/1/29 1/1/21 Source: World Bank, DEC Prospects Group Greek financial package supports euro. Greece s ability to roll over 2 to 3 billion in early 21 came under critical question in February, and the escalating risk of sovereign default exerted substantial downward pressure on the euro. The currency dropped 5% against the dollar, from $ on Feb- 2 to $ by Mar-25. Following partial resolution of the Greek dilemma through the financial package proffered by the Euro-Group of Finance Ministers and the IMF on Apr-11, the euro recouped half of its earlier loss, to stand at $ by Apr-14. On the sidelines of these developments, the yen weakened by a meaningful 7% against the greenback from on Mar-3 to by Apr-2, coming to stand at by Apr-14. This move represents, in large measure, response to renewed efforts by the Japanese MOF to reflate the economy through a doubling of a BOJ liquidity package to 2 trillion ($212 billion) over the course of 21. Interest-and growth differentials favor dollar. The correction of the euro tied to the Greek financial package may be a one-off for the near to medium terms, as exchange rate fundamentals are moving in the dollar s favor. USD-LIBOR, through exceptionally volatile, is moving toward parity with EURIBOR, stepping up to a range of.8-to 1% from.35% at the turn of the year. And the recent hike in U.S. Treasury yields closer to 4% has widened the gap with Bund to 75 basis points from nil at end-29. Growth differentials are to the U.S. unit s advantage as well, with April Consensus 21 projections placing U.S. growth at 3.2%; the Euro Area is viewed to post 1.2% gains for the year. Headline inflation up. A common recent development across countries is an upturn in headline inflation rates measured on a year-on-year basis (headline CPI includes all goods and services in the household consumption basket). More pronounced increases are found in the United States (-2% in July 29 to +2.4% in March 21 (y/y)) and China (-2.5% in July to 2.5% in February). The upturn is explained simply: the base period of skyrocketing commodity prices of 28 falls out of the year-on-year calculation while recent moderate inflation is now contrasted with the crash of international prices. Core inflation (excluding food and fuel) remains quite subdued, ranging from a decline of 1.8% in Japan to +1.8% in the United States in March 21. April 15, 21 page 12

13 Focus: Financing gaps High external financing needs in a time of sharp retrenchment in capital flows led to significant current account adjustments and slower growth in several developing countries in 29. This occurred despite support from better-than expected performance of the international bond and portfolio equity markets and increased official flows. 1,2 1, Modest recovery in private capital expected in 21 and 211 Net private capital flows to developing countries, $ billion Portfolio equity Private debt FDI Share of GDP [right axis] e 21 p 211 p Source: DataStream and World Bank, DEC Prospects Group External financing needs decline in $ trillion Maturing foreign debt [left] Current account deficit [left] External financing gaps are projected to fall Total gap ($bn): percent % of GDP of those countries with financing needs [right] 29 e 21 p 211 p Source: DataStream and World Bank, DEC Prospects Group 29e 21p 211p Low Lower-Middle Upper-Middle Source: World Bank DEC Prospects Group staff estimates Financing needs fall from $1.2-to $1.1 trillion in 21. Most of the decline in 21 is due to reductions in current account deficits forced on developing countries by a 4% cut in international capital flows in 29. Current account balances in deficit countries almost halved from a shortfall of $283 billion to $128 billion in 29. For several ECA countries, deficits narrowed by more than 5%. And medium-and long term debt coming due declined somewhat, reducing financing requirements; but short-term debt increased, leading to an overall rise in scheduled repayments of debt. Based on an assumption that current account deficit to GDP ratios remain at their 29 levels, total external financing needs of developing countries will be on the order of $1.1 trillion for 21 and 211. Private capital flows to developing countries are projected to recover modestly in 21 and 211. Private financial flows are expected to increase from $442 billion (2.8 percent of developing country GDP) in 29 to $765 billion (3.6 percent of GDP) in 211. The recovery is seen to be concentrated in net FDI flows, ratcheting up to $6 billion in 211 from $385 billion in 29. Net bond flows are also anticipated to be buoyant, increasing to $6 billion in 211 from $54 billion in 29. But syndicated bank lending is expected to remain subdued, and commercial banks redress balance sheets, and are unlikely to be willing to increase the share of risky assets in their portfolios. Given reduced financing needs and pick-up in capital flows, the ex-ante financing gap should halve to $18 billion by 211 from $352 billion in 29. As a share of GDP, the shrinkage of the financing gap is marked for upper-middle-income countries (UMICs) (1.5%) and low-income countries (LICs) (1.3%). Gaps will narrow for UMICs due to large current account adjustments notably in ECA, and rising private capital inflows. Since March 29, UMICs issued large international bonds and expect to do so in 21. The 1.3% of GDP fall in the financing gap of LICs mainly reflects adjustments in current account deficits in 29. Compression in the gap for lower middle-income countries was just.8% of their GDP, as current account adjustment varied substantially by economy, and a large number of countries drew down reserves to cover gaps. April 15, 21 page 13

14 Looking forward, while external financing needs are expected to decline, gaps will remain substantial for a number of countries. Despite a modest recovery expected in private capital flows, the increased debt problems of high-income countries might put additional pressure on developing countries access to external finance. Financing gaps were closed through current account adjustment and higher-than expected capital flows billions dollars Current Account Balance Source: World Bank, DEC Prospects Group Net Capital flows Predicted Actual Difference World Bank IMF Other official Total Source: World Bank Debtor Reporting System, IMF Net official flows increased sharply in response to the crisis billions dollars Sovereign debt issuance by high-income countries, Source: IMF and World Bank trillions dollars e 21f Financing gaps are an ex-ante notion, and expost, these can be closed through a combination of reduced spending, official inflows, reserve drawdown and improved capital flows. For 29, ex-ante financing gaps were earlier estimated at $352 billion. Current account adjustments reduced the ex-post gap by $14 billion. And net private capital flows (inflows-outflows, debt repayments, redemptions of debt) were $152 billion higher than initial expectations. Official flows more-than doubled in 29 (see below) and depletion of reserves accounted for the remainder. Official lending (including assistance from the IMF) jumped to $28 billion following the crisis in 28 and more-than doubled in 29 reaching $7 billion. The World Bank Group s lending increased three-fold to $21 billion. And between September 28 and February 21, more-than 2 countries entered agreements with the IMF, with four of the stand-by agreements (Romania, Pakistan, Hungary and Ukraine) larger than $1 billion. The IMF introduced a new flexible credit line that provided precautionary arrangements; but there have been no draws on this facility to date. Lending from other multilaterals as well as bilateral loans increased in response to the crisis. Despite lower gaps financing challenges remain. Mounting debt burdens of the high-income countries, in the wake of the financial crisis, may come to pressure developing countries access to bond markets in coming years. High-income OECD public debt issuance surged in 29 and is projected to rise further in 21, escalating competition for funds, and raising borrowing costs for emerging markets. This would largely affect UMICs and the bond markets. For the LICs given stilldepressed bank-lending, limited access of the group to bond markets, and lack of sufficient reserves, financing the projected gap of 6.5% of GDP in 21 will prove to be difficult, especially if ODA falls off, as it tends to do when donor countries are in recession. And those countries that avoided large current account adjustments during 29 by running down reserves may be forced to cut spending in 21 and 211, should further reserve depletion prove to be unsustainable. April 15, 21 page 14

15 Table A.1 Global industrial production growth (constant prices; percent; seasonally adjusted annual rates except monthly figures which are in percent change over previous month a/) Average Q1 Q2 Q3 Q4 Nov Dec Jan Feb World High - in come cou n tries Industrial countries United States Japan Euro Area United Kindgom Other high income Hong Kong (China) Singapore Taiwan (China) Dev elopin g cou n tries East Asia and Pacific China Indonesia Thailand Malaysia Europe and Central Asia Russian Federation Turkey Poland Czech Republic Latin America and Caribbean Brazil Mexico Argentina Colombia Middle East and North Africa Saudi Arabia Iran Egypt Algeria South Asia India Pakistan Bangladesh Sri Lanka Sub-Saharan Africa South Africa Nigeria Memo: OECD Developing excl. China Developing oil exporters Dev. non-oil exporters Asian high tech exporters a In general, series refer to industrial production excluding construction (e.g. manufacturing, mining and utilitites). Where this is not available the closest proxy is used, often manufacturing output or oil output, if the country is a major oil producer. April 15, 21 page 15

16 Table A.2 Demand conditions in high-income countries (US dollar values unless otherwise indicated; percent change; seasonally adjusted annual rates except monthly figures, which are m/m change) Weight Average Q2 Q3 Q4 Nov Dec Jan Feb Real GDP a High - in come cou n tries Industrial countries United States Japan Euro Area United Kindgom Other high income Hong Kong (China) Singapore Taiwan (China) Real merch an dis e imports b High - in come cou n tries Industrial countries United States Japan Euro Area United Kindgom Other high income Hong Kong (China) Singapore Taiwan (China) I mport Prices c High - in come cou n tries Industrial countries United States Japan Euro Area United Kindgom Other high income Hong Kong (China) Singapore Taiwan (China) Real effectiv e ex ch an ge rates d Euro Area United States Japan United Kindgom Canada Hong Kong (China) Korea, Rep Singapore Taiwan (China) Switzerland a/ Real GDP aggregated using 1995 weights. b/ JP Morgan Trade Weighted Indices (Real, Broad basis). Data are averages of monthly data for the period in question. April 15, 21 page 16