Developing Trends: June 2013

Transcription

1 Developing Trends: June 213 Global Economic Prospects MEDIUM TERM OUTLOOK The global economy is transitioning towards a less volatile period. Financial market risk indicators, such as credit default swap rates, sovereign debt yields, and stock-market volatility indicators have all improved significantly since June 212. Improved financial conditions and extraordinary monetary policy steps taken by central banks in high income countries have resulted a recovery of gross capital flows to developing countries to close-to-peak levels. Global GDP, which slowed in mid-212 is recovering, and a modest acceleration in quarterly GDP is expected during the course of 213. Whole-year growth for 213 is projected at 2.2 percent, a touch slower than in 212. The strengthening of quarterly growth will show up in whole-year GDP growth of 3. percent for 214 and 3.3 percent in 215. Among high-income countries, growth in Europe is being held back by weak confidence and continued banking-sector and fiscal restructuring. The recovery is on more solid ground in the United States, where a fairly robust private sector recovery is being held back, but not extinguished, by fiscal tightening. Meanwhile, in Japan, a dramatic relaxation of macroeconomic policy has sparked an uptick in activity, at least over the short term. Overall, growth in high-income countries is projected to accelerate slowly, with GDP expanding a modest 1.2 percent this year, but firming to 2. and 2.3 percent in 214 and 215, respectively. Financial indicators worldwide have improved since June 212 Gross capital flows to developing countries have recovered in nominal terms Source: World Bank; Global Economic Prospects 213B. Source: World Bank; Global Economic Prospects 213B. In the developing world, growth is solid but muted. Most developing economies have more or less completely recovered from the 28 crisis and are growing in line with underlying potential growth. Less volatile external conditions, a recovery of capital flows to levels that support growth, the relaxation of capacity constraints in some middle-income countries, and stronger growth in high-income countries are expected to yield a gradual acceleration of developing-country growth to 5.1 percent this year, and to 5.6 and 5.7 percent in 214 and 215, respectively (see below for region-wide trends). However, prospects for developing countries vary widely. At least four classes of countries can be identified: 1. Several countries in East Asia, Sub-Saharan Africa and a few in Latin America are growing rapidly and already close to or above potential, and therefore at risk of overheating. Developing Trends was prepared by the Development Economics Prospects Group (DECPG) of the World Bank. The team is coordinated by Sanket Mohapatra (Overview and Exchange Rates), and is comprised of Allen Dennis (Trade), Tehmina Khan (High-Income), Eung Ju Kim (Highincome and Finance), John Baffes and Damir Cosic (Commodities), Cristina Savescu (Industrial Production and Business sentiment), Ekaterine Vashakmadze (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.

2 Developing Trends: June 213 The global economy is moving to a less volatile but solid growth phase Real GDP growth, %ch 1. The projected pick-up in medium-term growth among developing countries differs across regions Real GDP growth, %ch World High income Developing e 213f 214f 215f 2. East Asia and Pacific Europe and Central Asia Latin America and Caribbean Middle East and North Africa South Asia Sub-Saharan Africa Source: World Bank; Global Economic Prospects 213B. Source: World Bank; Global Economic Prospects 213B. 2. Several large middle-income countries, such as Brazil, India, Russia, South Africa and Turkey, have struggled to regain pre-crisis growth rates due to capacity constraints despite significant stimulus. 3. Countries dealing with high unemployment and economic slack, due to the severity of the post-crisis downturn (developing Europe), or due to social and political turmoil (Middle East & North Africa). 4. The bulk of developing countries are doing fine, with output gaps closed or closing. RISKS TO THE OUTLOOK High income countries continue to face major challenges, but the risk of a major crisis have subsided. A new set of risks are gaining prominence: The potential effects of the radical relaxation of both fiscal and monetary policy in Japan. The 21 percent real effective depreciation of the yen between September and April could dampen developing-country exports. However, developing countries gain from increased import demand from Japan might outweigh the losses associated with the Yen s (real) depreciation. By adding to the looseness of global monetary conditions, it could lead to strong capital flows and potentially add to overheating pressures, especially in East Asia. A faster than expected decline in commodity prices. Over the past year, energy and metals prices have been easing in response to supply and demand-side substitution induced by high prices (metal and energy prices are down 3 percent and 14 percent since their early 211 peak). If commodity prices were to decline faster towards their long-term equilibrium than envisaged in the baseline, commodity exporting developing countries could experience serious fiscal setbacks and weaker GDP growth, although commodity importers would stand to gain. Withdrawal of quantitative easing in the United States. The eventual tapering of quantitative easing in the US and other high income economies is likely to cause interest rates to rise for developing countries. Higher rates may generate difficult adjustments and possibly domestic crises, especially in countries where public and private sector indebtedness has been on the upswing. Recent volatility reflects markets uncertainty about the stance of policy and its potential consequences. POLICY PRESCRIPTIONS For the many countries operating at close to or even above full capacity, macroeconomic policy may need to be tightened, both to re-establish fiscal space and to prevent inflationary pressures and asset bubbles from building up. Overall, with the demand gaps opened up by the crisis largely filled, future growth will increasingly be determined by the success with which countries succeed in addressing supply-side bottlenecks, including gaps in physical, social, and regulatory infrastructure. To achieve higher growth on a sustained basis, all developing countries will need to redouble efforts to restore and preserve macroeconomic stability, improve governance, simplify regulations, opening up to trade and foreign investment and investing in infrastructure and human capital.

3 Developing Trends: June 213 REGIONAL OUTLOOK Growth in the East Asia & the Pacific region slowed to 7.5 percent in 212 largely due to weakening of growth in China (relative to the recent path). The regional growth is projected to slow further to 7.3 percent in 213 with still weak 7.7 percent growth in China and easing of growth in the region excluding China from 6.2 percent in 212 to 5.7 reflecting weak global demand and domestic policy tightening. The regional growth is projected to pick up to 7.5 percent in 214 and 215 as China's growth firms up and growth in the region excluding China accelerates to 5.9 percent in 214 and then 6 percent in 215 supported by strengthening global trade flows. The main risks to the region are internal, associated with a sharp reduction in Chinese investment, quantitative easing in Japan and rapidly rising debt and asset prices pose risks for Indonesia, Malaysia, Thailand and the Philippines. Efforts to enhance productivity gains through market reforms should deepen, especially in Cambodia, the Lao PDR, Myanmar, and Vietnam, while building buffers against future shocks remains a policy priority in Lao PDR, and small Pacific islands. GDP growth in Europe & Central Asia is estimated to have sharply slowed to 2.7 percent in 212 from 5.6 percent in 211 as the region faced significant headwinds including weak external demand, deleveraging by European banks, a poor harvest, and inflationary pressures. While GDP growth in 213 in the region will be supported by improved agricultural performance and reduced deleveraging pressures, the rebound will nevertheless be constrained by the weak carryover growth caused by low economic activity in 212Q4; ongoing fiscal adjustments by the region s economies, and high unemployment. The recovery in export demand is expected to be gradual. The region s growth is expected to reach 2.8 percent in 213 and 4.2 percent by 215. Medium-term prospects for the region will critically depend on progress in addressing structural constraints to economic growth including capacity constraints, high unemployment, and lack of competitiveness. Growth in Latin America & the Caribbean is expected to strengthen to 3.3 percent in 213, from 3. percent in 212, supported by stronger demand domestically and abroad. Growth should converge toward potential after very weak growth in 212 in Brazil (.9 percent) and Argentina (1.9 percent). Growth in most other countries is expected to ease slightly or decelerate this year. Growth is expected to decelerate markedly in Venezuela (to 1.4 percent), as highly expansionary policies are reversed. Over the medium term, the regional economy is expected to grow just under 4 percent annually, supported by stronger capital flows (notably FDI), recovering external demand, and structural reforms in some of the larger economies. Such improvements will be essential if the region is to sustain stronger growth over the medium term in the context of slow growth among major trading partners. Risks facing the region include the possibility of overheating in some of the faster-growing economies and the potential impacts of even weaker-than-projected commodity prices. Growth in the Middle East & North Africa region is projected to slow to 2.5 percent in 213, from 3.5 percent in 212, reflecting a second year of recession in the Islamic Republic of Iran, subdued growth in the Arab Republic of Egypt, and a modest pickup in Algeria. Political tensions remain high in advance of scheduled elections and referendums, and security risks are dragging down activity and investment. In the wake of lower private capital inflows since 21, fiscal and external account imbalances among oil importers are increasing, in turn exacerbating funding pressures and undermining fiscal sustainability particularly in Egypt. However, a gradual strengthening of demand in key Euro Area trading partners and the moderation in global food prices could provide some respite in the near term. Among oil exporters, surging government spending has increased vulnerability to a sustained fall in oil prices. Medium-term prospects hinge on the resolution of political tensions and security risks, and on the implementation of reforms to place the region s economies on a more sustainable footing and to boost investment, jobs, and growth. GDP growth in South Asia slipped to 4.8 percent in 212, mainly reflecting a continued deceleration in India, and slower growth in Sri Lanka and Bangladesh. Growth in Pakistan and Nepal remains sluggish, below regional peers. Regional GDP growth is projected to pick up to 5.2 percent in 213, before accelerating to 6.1 percent and 6.4 percent in 214 and 215, in line with strengthening external demand, normal monsoons (after poor rains in 212), and a gradual pickup in investment spending. Continued progress in fiscal consolidation and implementation of reforms that reduce structural constraints and lower inflationary expectations will determine the pace of recovery. Domestic risks that have gained in importance include a possible derailing of reforms, a resurgence of inflation, and weaker-than-expected monsoon rains. Growth in Sub-Saharan Africa has remained robust at an estimated 4.4 percent in 212 (5.4 percent if South Africa is excluded), supported by resilient domestic demand and still relatively high commodity prices. Strengthening external and resilient domestic demand, an accommodative policy environment, increasing investment, still high commodity prices, and increased export volumes in countries with new mineral discoveries (Sierra Leone, Niger, and Mozambique) are expected to underpin a return to the region s pre-crisis growth rate of around 5.2 percent over the forecast horizon (213 15). Nonetheless, risks remain tilted to the downside. A weaker-than-expected recovery in high-income countries and sharper-than-expected decline in commodity prices will slow growth in the region and lead to deterioration in fiscal and current account balances, which remain strained in a number of economies in the region. Other domestic risks include overheating in economies operating close to capacity, adverse weather conditions, and political instability. [Please click on the Region name to go to the relevant regional outlook webpage]

4 Developing Trends: June 213 Table 1.1 The global outlook in summary (percentage change from previous year, except interest rates and oil price) e 214f 215f Global Conditions World Trade Volume (GNFS) Commodity Prices (USD terms) Non-oil commodities Oil Price (US$ per barrel) International capital flows to developing countries (% of GDP) Developing countries Net private and official inflows Net private inflows (equity + debt) East Asia and Pacific Europe and Central Asia Latin America and Caribbean Middle East and N. Africa South Asia Sub-Saharan Africa Real GDP growth 2 World Memo item: World (PPP weights) High income Euro Area Japan United States Developing countries East Asia and Pacific Europe and Central Asia Latin America and Caribbean Middle East and N. Africa South Asia Sub-Saharan Africa Source: World Bank. Notes: PPP = purchasing power parity; e = estimate; f = forecast. 1. Simple average of Dubai, Brent, and West Texas Intermediate. 2. Aggregate growth rates calculated using constant 25 dollars GDP weights. The full report and accompanying datasets are available at

5 High income (1) As acute risks have diminished, activity in high income economies is recovering gradually. The Euro Area s recession appears to be easing and business confidence on the mend, but high unemployment and tight credit suggest only a slow recovery in periphery economies. The US recovery is being led by a fairly robust private sector recovery despite fiscal tightening but manufacturing confidence has turned down. Aggressive macroeconomic easing in Japan has boosted activity strongly, with Q1 GDP growth the fastest among G-7 countries. The US recovery is being led by the private sector where activity has held firm, despite fiscal drags US GDP rose 2.4% (q/q saar) in Q1, up from a very weak.4% outturn in Q4 supported by a continued recovery in housing and labor markets that helped offset the impact of sharp payroll tax increases on consumer incomes. With some 82, private sector jobs created this year until May, household spending has held up with retail sales up 4.8% (3m/3m saar) in April. However IP growth eased to 2.9% (3m/3m saar) in April from 4.1% in March. The ISM manufacturing PMI survey indicated a contraction for the first time since November 212, although service PMIs have continued to improve. The recession in the Euro Area appears to be easing and business confidence has improved In the Euro Area GDP contracted once again, but at a slower pace of.8% (q/q saar) in Q1, vs. Q4 s 2.3% fall. Investment fell sharply again in Q1, but private consumption rose by.1% after a.6% quarterly decline in Q4. Spain, Italy and Portugal contracted at a slower pace than in Q4, while France contracted at the same pace as in Q4. Growth in Germany turned marginally positive in Q1, and data indicate further strengthening in industrial activity which rose by 6.7% (3m/3m saar) in April, the fastest since May 212. Forward looking May Eurozone PMIs showed an easing in the manufacturing downturn for all countries surveyed, with the index just shy of expansion at 49.4 in Germany, and rising to a 2- year high in Spain (44.7) and 23-month high in Greece (45.3). However unemployment remains at record levels and credit tight in the high-spread economies. Activity has rebounded strongly in Japan supported by aggressive macroeconomic easing. GDP rose by 4.1% (q/q saar) in Q1, up from 1.% in Q4, vs a first estimate of 3.5% led by higher private spending and exports. Industrial activity and consumer spending growth accelerated, with IP up 11.5% (3m/3m saar) in April from 8.9% in March. Retail sales rose by 3.2% (3m/3m saar), vs. 2.4% in March. Consumer confidence rose for the 5th straight month in May, to its highest since May 25. Manufacturing PMIs also showed sustained recovery, with the index at a 21-month high at Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Diffusion Index HIY retail sales Volume, 3mma saar % chg US Japan Germany EMU Manufacturing purchasing managers index (PMI) Euro Area USA Japan Germany Italy 5-line 4 Jan-1Apr-1Jul-1Oct-1Jan-11Apr-11Jul-11Oct-11Jan-12Apr-12Jul-12Oct-12Jan-13Apr-13 Source: World Bank Prospects Group and Markit Last updated: Jun. 18, 213

6 High income (2) G3 stock market performance was quite strong in the first five months of 213, led by Japanese equities; but has slumped since late May. The cost of insuring Italian and Spanish debt have widened lately, albeit not significantly. Portugal posted the largest widening in CDS spreads among Eurozone economies. Furthermore, borrowing costs for Italy, Spain, and Portugal have risen considerably recently amid global markets rout. G3 stock market performance was quite strong in the first five months of 213, led by Japanese shares, but have declined lately. Japan s Topix soared nearly 5% between Jan and late May as a result of the Bank of Japan s massive monetary stimulus plans. But the index suffered a sharp sell-off amid global stock sell-off, falling 17% over the past four weeks becoming the most visible sign of the volatile and unsustainable nature of the sharp rise in asset prices. U.S. stocks have been robust with both the S&P 5 and Dow marking multiple record highs. The S&P has gained 14% this year (and 143% from a 12-year low reached in March 29). Germany s DAX index has gained 6.3% thus far this year, a smaller gain than its G3 counterparts. Credit default swap spreads for troubled Euro- Area economies have widened lately, albeit not significantly. CDS spreads for Spain and Italy have widened by 53 and 5 basis points (bps) since late May, as investors weighed the potential impact of the scaling back of the U.S. stimulus program. Spreads for Portugal are currently at 385bps, up from this year s low of 279 bps reached last month. But they are significantly lower than last year s high of 1,561 bps. Average CDS spreads for troubled Euro-zone countries have been relatively steady this year with Ireland s spreads experiencing least volatility. Borrowing costs for Italy, Spain, and Portugal have risen lately in the wake of a sell-off in global financial markets. The benchmark 1-year yields on Italian and Spanish government bonds have risen by 47 bps and 41bps since late May after they reached 2- year lows in late-april. Nevertheless, the 1-year borrowings costs for Italy and Spain have declined by 14 bps and 65 bps this year. Meanwhile, comparable Portuguese bond yields have surged 128 bps after a similar adjustment since late May, posting the highest volatility among Euro-area government bonds. Index, January 1 21= S&P-5 (USA) 8 DAX (Germany) Topix (Japan) 7 Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Daily CDS Sovereign rates since Jan Basis points 2, 1,6 1,2 8 4 Portugal Ireland Spain Italy Belgium G-3 equity markets Jan-1Apr-1Jul-1Oct-1Jan-11Apr-11Jul-11Oct-11Jan-12Apr-12Jul-12Oct-12Jan-13Apr-13 Daily yields on 1-year government bonds Yield (percent) Portugal 9 8 Spain Italy 3 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Source: Bloomberg and Development Prospects Group page 1

7 Industrial Activity Global industrial production expanded at a faster pace of 3.4 percent in the first quarter of 213, supported by a surprisingly strong outturn in the US, and recovery in industrial output in Latin America and the Europe and Central Asia, but the second quarter started on a weaker note, with a broad deceleration in growth, especially among developing economies. Growth surprised on the upside in Japan, accelerating to 11.5 percent annualized pace in the three months leading to April, but eased somewhat in the US. Global IP shows signs of softening at the start of the second quarter Industrial production in the U.S. expanded at a 3.6 percent annualized pace in the three months leading to April 213, up from the 2.6 percent annualized pace recorded in Q4 212, despite a significant fiscal drag In the Euro area industrial production stabilized, expanding.7 percent annualized in the first quarter of 213 compared to a 8.1 percent annualized pace of decline in the fourth quarter of 212. Growth in Japan rebounded to close to 11.5 percent saar in the three months to April, helped in part by the large depreciation of the Yen. Developing countries industrial output growth eased to 3.3 percent annualized pace in the three months to April. East Asia and Pacific s industrial production grew at a 8.6 percent annualized pace and China s industrial output expanded at a 9.7 percent annualized pace in the first quarter of 213 but growth has since decelerated to 6.5 percent and 7.6 percent in the three months to April. IP contracted at a 1.7 percent saar pace in Latin America and the Caribbean in the three months to April as performance in Mexico has been softening and despite a modest improvement in growth in Brazil. Growth eased markedly in South Asia while expanding faster in Europe and Central Asia. Output growth accelerated to 5 percent annualized pace in Europe & Central, on account of strengthening performance in Russia and Turkey. Growth also decelerated in the South Asian subcontinent to a 4.5 percent annualized pace in the three months leading to April, on account of sharply weaker performance in India. Data for the Middle-East and North Africa and Sub Saharan Africa lags, but was still declining in both regions in the three months to February. Global industrial production starts Q2 on a softer note percent, 3m/3m saar Jan ' Jan '2 Jan '4 Jan '6 Jan '8 Jan '1 Jan '12 Source: World Bank, Datastream. Growth eased at the start of Q2 in major developing economies percent 3m/3m saar Jan ' Jan '2 Jan '4 Jan '6 Jan '8 Jan '1 Jan '12 China East Asia, excluding China Latin America & Caribbean Source: World Bank, Datastream. Growth eases markedly in South Asia and strenthens in Europe and Central Asia percent, 3m/3m saar Jan ' Jan '2 Jan '4 Jan '6 Jan '8 Jan '1 Jan '12 Europe & Central Asia Middle East & N. Africa Source: World Bank, Datastream. South Asia

8 Business Sentiment The step down in the global manufacturing Markit PMI in April to the lowest level since December (but still above the 5 mark that indicates expansion) followed by a marginal increase in May suggest that global manufacturing output growth is moderating into the second quarter of 213. Sentiment regarding leading indicators components such as new orders and finished goods inventories improved only modestly.. Global Manufacturing Purchasing Manager s survey indices (PMI) deteriorated slightly in April High-income and developing countries PMIs moved in opposite directions in May, with sentiment improving in most high-income countries surveyed and deteriorating in three quarters of developing countries. Growth in global manufacturing inched up in May, to 59.65, with business sentiment in the US PMI deteriorated to a six-month low in April, before inching up to 52.2 in May. Although the Euro Area sentiment inched up to 47 in May to the highest level since 212, but it continues to indicate contraction albeit at a slower pace. Sentiment improved in Germany, France, Italy, and Spain (albeit from depressed levels). Sentiment in Japan improved for a fifth consecutive month, to its highest level in more than a year. Sentiment in developing countries deteriorated, mostly on account of the deterioration in Asia. PMIs in major developing countries such as Brazil, China, India, Russia and Turkey all declined for two or more consecutive months. The May PMI has been weaker than expected in China, where the PMI retreated 1.2 points to Business sentiment in India continued to deteriorated dropping an additional.9 points in May. Business confidence remained relatively stable in Russia, with the PMI inching down.2 points in May, but remaining in growth territory. Business sentiment deteriorated in the largest economies in South Asia and Latin America In Latin America. Brazil s sentiment declined.3 points, but remained ion growth territory (5.4), while remaining stable in Mexico (51.7). In Turkey sentiment inched down.2 points to 51.1, the lowest in 9 months. Business sentiment remained relatively unchanged in South Africa, inching down only.1 points to 5.4. Business sentiment moved in opposite directions in developing and high-income countries in May Balance of respondents, >5 indicates growth Jul '1 Jan '12 China Developing, excl. China High Income Source: World Bank, Haver Analytics, Markit. Business sentiment continues to deteriorate in major emerging economies in May Balance of respondents, >5 indicates growth Jan '1 Jan '11 Jan '12 Jan '13 China India Russia Source: World Bank, Haver Analytics, Markit. Business sentiment continues to deteriroate in May in many developing countries Balance of respondents, >5 indicates growth Jan '1 Jul '1 Jan '11 Jul '11 Jan '12 Jul '12 Jan '13 Brazil Mexico Turkey South Africa Source: World Bank, Haver Analytics, Markit.

9 International Trade (1) Following the cyclical rebound in global trade in Q4 212, the global trade expansion continued through Q1 213, albeit at a weaker pace. Import demand in developing countries is decelerating but among high-income countries it is contracting. Going forward, with business sentiment indicators suggesting a softer patch in Q2 213, it is likely that import demand in both developing country and high-income countries will continue to weaken. Global trade expansion decelerated in Q Global trade increased at an annualized pace of 1.4% in the three months to April, compared with to the 5.7% expansion in Q1 213, and 5.8% in Q However, while developing countries sustained their acceleration in import demand between the Q4 212 and Q1213, the pace of expansion in high-income imports contracted, mostly driven by weaker import demand from the United States. The cyclical weakness in US import demand was however mitigated by strengthened import demand from Japan, as the effects of recent stimulus measures begins to impact real side activity. In April import demand growth in Japan was up 6% (3m/3m saar) from 3.6% the previous month. Global Import v olumes Percent change, 3m/3m saar World High income Developing Developing excl. China -1 Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 Import demand among developing countries is likely to weaken through Q Through Q1 213 available data suggests that the expansion in developing countries was broadbased across all developing regions. However early indicators are that import growth will likely decelerate in Q Indeed, where April data is available, import growth has decelerated in East Asia, South Asia, Latin America and Europe and Central Asia. Further Purchasing Manager Indices in May for a number of large emerging economies (China, Brazil, Turkey, India) also point to the weakening in activity. Regional Import v olumes Percent change, 3m/3m saar 6 East Asia & Pacific East Asia & Pacific (ex. China) Europe & Central Asia Latin America & Caribbean Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 Data lags behind in Sub Saharan Africa and the Middle East and North Africa. However latest data shows Sub Saharan Africa to have registered a rebound in import demand in Q1 213, while the contraction in the Middle East and North Africa deepened. Data for both sub Saharan Africa and the Middle East and North Africa lag behind. Latest available data shows that, as was the case for other developing countries during Q1 213, import demand for Sub Saharan Africa strengthened in January and February 213 at a robust 12.8% and 18.5% annualized pace respectively. However in the Middle East and North Africa, the contraction in import demand persisted through February (-3.5% in January and 4.1% in February, 3m/3m saar), reflecting the effects of political challenges on demand conditions in the region. Regional import v olumes Percent change, 3m/3m saar South Asia -2 Sub Saharan Africa South Africa Middle East and North Africa -4 Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13

10 International Trade (2) Consistent with the weakening of import demand, export growth has also slowed down in recent months. As with imports, high-income country export growth is contracting, whereas for developing countries the pace of expansion has decelerated. However, the picture is mixed across developing regions. The deceleration is strongest in the East Asia and to a lesser extent in South Asia and in Latin America & Caribbean export growth is actually accelerating,. There has been a broad-based deceleration in export growth in recent months. Consistent with the decelerating pace of import demand, export growth among both high-income and developing countries decelerated in the three months to April. However, unlike high-income countries where export growth contracted (-4.8% in April, 3m/3m saar) export growth continued expanding for developing countries as an aggregate (9.1% in April from 16.% in March). Excluding China, developing countries exports growth expanded at a much weaker 5.5% in the three months leading to April. Global export v olumes Percent change, 3m/3m saar World High income Developing Developing excl. China -2 Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 Export growth among developing regions remains heterogeneous. Among developing regions for which data is available for through April 213, the deceleration in export growth was sharpest in East Asia. Export growth there fell to 11.5% in April from 26.8% in March. Excluding China, export growth there was flat in April (.1%, 3m3m saar). The deceleration of export activity was also observed in South Asia, however to a lesser extent. On the other hand in Latin America & Caribbean where exports contracted in both February and March, export growth accelerated to 5.5% in April from 5.% in March. To a lesser extent export activity accelerated in Europe & Central Asia supported by a rebound in Russian exports. Exports in both Sub Saharan Africa and Middle East both recovered in Q Data for both Sub Saharan Africa and the Middle East lags behind other developing regions. However available data through January and February shows a solid rebound in export growth for both Sub Saharan Africa and in the Middle East and North Africa region. However, while export growth in Sub Saharan Africa in February sustained its January levels, there was a marked deceleration in import growth in the Middle East and North Africa in February. Given the overall deceleration in global import demand, and with the easing of commodity prices, it is likely that export growth in both regions will be much weaker in Q Regional export v olumes Percent change, 3m/3m saar 6 East Asia & Pacific East Asia & Pacific (ex. China) Europe & Central Asia Latin America & Caribbean Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 Regional export v olumes Percent change, 3m/3m saar South Asia Sub Saharan Africa South Africa Middle East and North Africa -6 Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13

11 Commodities (1) Prices of most industrial commodities (crude oil and metals) as well as precious metals have been range bound so far in June, just like in May, after precipitous declines in April. However, prices are still far from mid- February peaks as the markets remain well supplied and demand remains sluggish amid signs of a soft patch in the global recovery. Oil prices have been flat in June, Brent down 14%; WTI down 3% since their mid-february peaks. After topping at $119/bbl in mid-february, Brent (the international marker) has reversed course and by mid-june has hovered around $12/bbl. The oil demand picture is weak at a time when oil supplies are plentiful from both OPEC and non- OPEC sources, and US crude oil inventories have risen to an all-time record high of above 395 million barrels, in data going back to WTI price (US mid-continent price) has fallen less than Brent as producers are by-passing Cushing, Oklahoma and transporting oil directly to refineries in the Gulf by train, in turn strengthening WTI prices relative to Brent. The gap between Brent and WTI narrowed to US$ 6/bbl by mid-june 213, the lowest level in 2.5 years. Metal prices have continued their slide in June. Metal prices have sharply reversed course since mid-february and most are down on a year-todate basis. Prices of nickel, tin, copper and aluminum have declined by 22%, 18%, 14% and 14%, respectively, from their mid-february peaks to the 2nd week of June. Most base metals are well supplied in 213 which is likely to exert downside pressure on prices. Copper and aluminum are well supplied as evidenced by large stocks at the major metals exchanges (1% and 4% of annual consumption for aluminum and copper respectively). Combined stocks of copper at the three metals exchanges (New York, London and Shanghai) have increased by 45% in the first five months of the year. Precious metals prices are flat, bar sliver, in June after experiencing sharpest decline in 3 years in April. Precious metals have been on the decline since early 212Q4 and price of gold, silver and platinum are down 16%, 26% and 5%, respectively, for the year. With reduced tail risks and the outlook for the US economy which implies bottoming out of growth in 213 and an eventual end to QE3, investors are seeking yield elsewhere, driving gold prices down. Indeed, precious metals experienced one of the sharpest declines on record on April 15. Holdings of gold by ETFs are down (19% year-todate), while silver and platinum are up 1% and 35%, respectively, as they have some industrial use. USD per barrel Oil prices 8 Brent West-Texas Intermediate 7 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr Index, January 212=1 14 Metals Prices 9 Tin Copper 8 Nickel Aluminium 7 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 US$/troy ounce 1,9 1,8 1,7 1,6 1,5 Precious Metal Prices 1,4 Gold Platinum Silver (right axis) 1,3 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 US cents/troy ounce 3,6 Source: World Bank Prospects Group and Handy&Harman Last updated: Jun. 18, 213 3,4 3,2 3, 2,8 2,6 2,4 2,2 2,

12 Commodities (2) The US Department of Agriculture (USDA) left largely unchanged its outlook for the 213/14 global crop at its June 1 update. Not surprisingly, grain prices moved little maize and wheat are traded at levels similar to those before last summer s heat wave. Raw material prices diverged again; cotton prices up due to tighter supply condition and rubber prices down due to a production increase by Thailand. Maize and wheat supply outlook improves; rice market remains well-supplied. In its June 12, 213 update, the USDA confirmed the improved outlook for the 212/13 global grain crop. Global maize output is expected to reach 963 million tons in 213/14, slightly down than the May update but 12.5% higher than current season s crop; the stock-to-use ratio (S/U) is expected to reach 16.2% in 213/14, up from current season s 14.4%. Wheat supplies are expected to improve as well with output up more than 6% and S/U ratio 26.1%, remarkably similar to current season s 26.8%. The rice market continues to be well supplied with production estimated at 48 million tons, and S/U ratio 22.8%, similar to historical norms. Grain prices have been remarkably stable since their sharp mid-may decline. Following sharp declines after USDA s stock assessment for 213Q1, maize has been traded remarkably stable around 65 US cents per bushel since the beginning of May. Wheat prices, which experienced a small decline earlier in May have been stable around 68 US per bushel. Yet, price risks for the 213/14 crop are still on the upside as some delayed plantings in the US could upset markets. Although rice prices declined 2.5% in May they have been remarkably stable generally during the past 12 months fluctuating very little at around US$55 per ton. Rice price risks, however, are on the downside, depending on how the Thai government handles its publicly-held stocks. Supply concerns boosted cotton prices while rubber prices declined on demand-weakening concerns; separately, edible oil prices strengthened. Cotton prices reversed their declining trend on news of weaker than expected global crop for 213/14 (more than 5% down), on the top of this season s 5% decline. Natural rubber prices, which strengthened considerably during April and early May, reversed the trend following strong production (and export) growth from Thailand the world s largest rubber supplier. Separately, the edible oil index gained 3.7% in May (regaining all April losses) due to weatherrelated difficulties with soybean panting in the US as well as lower than expected yields of rapeseed in Europe (especially France) % 35% 3% 25% 2% 15% 1% US$ per metric tonne Grain prices Wheat Maize 2 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Source: World Bank Prospects Group and CME Last updated: Jun. 18, 213 US$ per kilogram Marked improvements in grain markets (stock to use ratio, percent) Maize Cotton [Left] Rubber [Right] Wheat Source: US Department of Agriculture (June 12, 213) Raw material prices Rice US$ per kilogram 4.4 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Source: World Bank Prospects Group, ICE and SGX Last updated: Jun. 18,

13 International Finance (1) CDS spreads for developing countries have widened this year, driven mostly by a sharp rise in Argentinian spreads. Mature-market stock markets have significantly outperformed those of developing countries. Stock markets in Emerging Europe and Emerging Asia regions have retreated thus far this year with Emerging Asia equities faring better than other regions. Developing-country CDS rates have been rising this year despite a favorable external environment. CDS spreads for developing countries have widened by 117 bps on average thus far this year, despite the improved ratings of developing countries, and strong investors appetite for developing-country bonds. The increase was due mainly to a sharp rise in Argentina spreads, which jumped 2,329 bps, amid the country s ongoing legal battle with creditors. Excluding Argentina, developing-country sovereigns also saw their spreads rising 44 bps this year amid a recent rout in global financial markets. Daily CDS Sovereign rates since Jan Basis points East Asia & Pacific Europe & Central Asia Latin America & Caribbean Middle-East & North Africa Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Developed country stock markets have considerably outperformed developing countries thus far this year. Mature-market stocks advanced sharply in the first five months of 213, outperforming developing-country stocks significantly, but have declined since late May amid concerns about a withdrawal of central bank stimulus. Developing-country stocks have declined 5.8% thus far this year, compared with a 1.6% gain for developed countries. Developing-country stocks have been hampered by worries over slowing economic growth, weak corporate earnings, and falling commodity prices. Country specific factors also weighed on developing-country shares. Index (Jan 1, 211 = 1) MSCI Equity Indices Emerging Markets Developed Markets 7 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Stock markets across developing regions have retreated thus far this year. General weakness was seen among developing country stock markets this year, with Emerging Asia stocks faring better than other regions. Regional indexes for Latin America, Emerging Europe and Emerging Asia have tumbled 11.1%, 7.3%, and 5.7%, respectively, thus far this year. Notably, stock market indexes in Indonesia, Malaysia, the Philippines, and Thailand gained sharply earlier in the year, all posting record highs, thanks to strong inflows of foreign capital. However, they declined since late May on concerns about their high valuations and a withdrawal of quantitative easing in high income countries. MSCI Regional Equity Indices Index (Jan 1, 211 = 1) MSCI Asia MSCI EE MSCI LAC 7 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13

14 International Finance (2) Borrowing costs for developing-country sovereign debt have widened since a January record low, with particularly sharp rise in June, but they remain much below historical average. Developing-country bond and equity funds posted large net outflows in June amid deteriorating investor sentiment. However, gross capital flows in the first five month of 213 are up 64% from the like period last year. Spreads for developing-country sovereign bonds have been rising despite a the risk-off phase. Developing-country sovereign borrowing costs have risen 99 basis points (bps) since early January, when they reached this year s low of 245 bps. Unlike previous episodes, the recent widening in the spreads took place during a period of heightened global risk aversion. Widening in spreads has accelerated since late May as growing expectations that the pace of quantitative easing in the United States may ease sooner than expected. But it remain much below the historical average. Developing-country bond spreads sicne June 211 (JP Morgan EMBIG spreads, basis points ) EM sovereign bond spreads 2 27 Average 2 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Source: Bloomberg and Development Prospects Group Developing-county bond and equity funds posted sharp outflows in first two weeks of June After reaching record highs in January, portfolio flows to emerging-market mutual have fallen in recent months, with particularly large outflows in June amid growing concerns over stimulus. EM equity funds posted sharp net outflows in March and April, but the pace of outflows eased in May. But equity funds posted outflows of about $1 billion in the first two weeks of June. In contrast, EM bond funds have been stable this year, averaging monthly inflows of $8.7 billion until May. But they also faltered in June, posting the first weekly outflows in nearly year (with accumulated June-to-date outflows of $4.6 billion). Capital flows remained robust in May, sending year-to-date flows to record highs Gross capital flows to developing countries remained resilient at $64.2 billion in May as a rise in bank lending and equity flows fully offset the drop in bond issuance. Flows for the first five months of 213 rose 64% year-on-year to a historic high of $36 billion, with all segments of the market posting strong gains. Until May, capital flows increased in every developing-country regions, except Middle East and North Africa. Europe & Central Asia recorded the strongest gain helped by strong bank and bond flows to Russia. Preliminary data suggest a sharp drop in flows in June, led by a plunge in bond issuance. Foreign portfolio inflows to developing countries $ billions EM Equity Funds Jan May Sep Jan May Sep Jan May Gross Capital Flow s to Dev eloping Regions $ billion, 3-mon. m.a Source: EPFR and Development Prospects Group EM Fixed Income Funds Bond Issuance Equity Issuance Syndicated Bank Loans Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13

15 International Finance (3) Equity flows have been robust n 213, with year-to-date flows rising 69% from a year before. Bond flows posted record highs in the first five months of 213, driven mainly by strong demand for developing-country corporate debt. Bank lending is also up sharply this year on the back of strong lending to developing Europe and Central Asia, with Russia receiving the bulk of flows. Equity flows have been strong this year. Equity placements (a combination of IPOs and follow-on issuance) reached $13.5 billion in May, up 21% from April, thanks to strong issuance activity in China and Russia. Year-to-date flows reached $56.3 billion, up 69% from a year before. China along with Brazil, India, and Russia dominated overall equity volume thus far this year, accounting for 64% of total equity issuance; but there were also an increase in equity flows to other countries, including Indonesia, Philippines, Thailand, Chile, and Mexico. Meanwhile, June-to-date volume is down sharply, only about $2 billion, from a monthly average of $11 billion in the first five months of 213. Bond issuance volume reached a historic high in the first five months of 213. Bond issuance has been on a record pace, posting monthly averages of $32 billion this year, driven mainly by strong demand for developing-country corporate debt as investors searched for higher yields. Corporate borrowers have taken advantage of record low borrowing costs and issued an all-time high of $129 billion so far this year, about twice the level issued last year. But preliminary data suggest EM bond issuance activity has virtually ground to a halt thus far in June. Only 5 new issues from Chile, Russia, Brazil, and Turkey raised mere $1 billion as of June 13th $ billion (3-mon. m.a.) International Equity Issuance East Asia & Pacific Europe & Central Asia Latin America & Caribbean Middle East & North Africa South Asia Sub-Saharan Africa Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 $ billion (3-mon. m.a.) 14 International Bond Issuance East Asia & Pacific Europe & Central Asia Latin America & Caribbean Middle East & North Africa South Asia Sub-Saharan Africa Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Syndicated bank loans rose sharply this year on the back of strong lending to ECA. Syndicated bank lending to developing countries rose nearly 7% year-on-year to reach $65 billion during the first five months of 213. The increase was due mostly to strong lending to ECA region. Russia received the bulk of loans to the region, with a sharp rise in lending originating from European banks. Almost 7% of the bank lending this year went to resource-related companies, mostly for acquisition and trade finance purposes. $ billion (3-mon. m.a.) Bank Lending East Asia & Pacific Europe & Central Asia Latin America & Caribbean Middle East & North Africa South Asia Sub-Saharan Africa Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Source: Deallogic, DEC Prospects Group Last updated: Jun. 18, 213

16 Exchange Rates Sharply relaxed monetary policy in Japan caused the yen to depreciate by 23% in trade-weighted real effective exchange rate (REER) terms since September 212. The euro appreciated 3.% in REER terms and the US dollar by 2.4% in this period. The appreciation of developing-country currencies (due to yen depreciation and robust capital flows) slowed slightly in May, together with a strengthening of the US dollar on expectations of a slowing of the pace of quantitative easing, and slowing growth in several emerging market economies. Sharply relaxed monetary policy in Japan caused the yen to depreciate 23% in REER terms since September 212. The euro appreciated 3.% and the US dollar by 2.4% in the same period. A sharply relaxed monetary policy in Japan to counter a decade-long deflation and support economic growth caused the Japanese yen to depreciate 23% in real effective (REER) terms between September 212 and April 213. In the same period, the US dollar appreciated 2.4% in REER terms and the euro by 3.%. The US dollar has strengthened in recent weeks in expectation that the pace of quantitative easing may slow. The Euro gained after Draghi s pledge in June 212 to stand behind the euro, but faltered since February after weak growth outturns in Q1. High income real effective exchange rates Index, Jan 211 = Japan USA Euro Area 76 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 The strong developing-country REER appreciation slowed in May amid weak growth and strengthening of the US dollar. Emerging market currencies had appreciated in REER terms (4.3% since Sept 212) due to the sharp depreciation of the yen, and as financial market stabilization in Europe and US quantitative easing pushed capital flows towards highyielding emerging market assets. East Asian trade -partners of Japan have faced sharp REER appreciation since September 212, particularly Thailand (1.2%), Malaysia (6.5%), China (5.6%), Philippines (5.1%), and Indonesia (4.9%). But the pace of appreciation of developingcountry currencies slowed in May amid strengthening of the US dollar and weaker growth outturns in several middle-income countries in Q1. The Brazilian real and the South African rand weakened in REER terms in May. The Russian ruble appreciated (+5.4% since Sep. 212) from robust banking sector inflows, despite a recent easing of crude prices. The Mexican peso benefited (8.9% REER appreciation) from strengthening demand in the US. The Turkish lira strengthened until May from capital inflows (7.7% REER), with a broadly stable nominal effective exchange rate (NEER) and inflation differential with trade-partner countries. The South African rand continued to weaken in REER terms (-6.%) together with slower growth, related partly to mining sector problems. The Indian rupee was stable in REER terms in May, but depreciated sharply in June against US dollar due to growth and current account concerns. Developing real effective exchange rate Index, Jan 211 = Brazil China India Indonesia 11 Mexico Russia Turkey South Africa Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Developing nominal effective exchange rate Index, Jan 211 = Brazil China India Indonesia 8 Mexico Russia Turkey South Africa 75 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13