98942 For more information, visit www.worldbank.org/globaloutlook Taking Stock  Oil prices fell to new lows. Oil prices declined to levels last hit in May 2009 as concerns about a stock surplus and demand weakness weighed on crude markets. ICE February Brent—the international oil marker—fell $2.67 to $53.75 a barrel in Monday trading to fresh five-and-a-half-year lows. Meanwhile, the Nymex February West Texas approached $50 a barrel and the US benchmark dropped $2.14 to $50.55.  The euro continued to slide. The euro dropped to $1.1809 on Wednesday, its weakest level since 2006, as Eurozone consumer prices fell by a more-than-expected 0.2 percent annually in December, the lowest since September 2009. The inflation rate in Germany, the bloc’s laregst economy, slowed to 0.1 percent (y/y) in Dec ember from a 0.5 percent in November, which was the lowest figure since October 2009. Concerns that tumbling oil prices will tip the currency bloc into a deflationary spiral have strengthened the case for the European Central Bank (ECB) to take bold policy action, such as sovereign asset purchase, to ward off deflationary risk in the monetary union.  Investor sentiment in the Eurozone improved. Eurozone’s Sentix investor confidence index unexpectedly improved for the third consecutive month, climbing to 0.9 in January from -2.5 in December. Economists had forecast the index to improve to -1. The expectations sub-index rose to 13.5 from 12, while the current situation index rose to -11 from -16. The recent sharp drop in oil prices and the continued weakness in the euro were cited as the reasons behind the latest improvement in investor morale.  China’s service sector continued to strengthen. China’s HSBC/ Markit Services Purchasing Managers’ Index (PMI) climbed to 53.4 in December, expanding for the eighth straight month and up from 53.0 in November. A sub-index measuring new business cooled slightly in December but remained well in expansion territory. The labor market was also buoyant, with the employment sub-index hitting an 18-month high. A sub-index for business expectations for the year ahead, however, dipped to its lowest reading since August 2014.  Brazil’s industrial production remained weak. Industrial production declined more-than-expected 5.8 percent (y/y) in November after a 3.3 percent slump in October and was weaker than the 4 percent decline expected by economists. At the same time, inflation rose above target and the budget deficit deteriorated further. FIGURE 1 Oil prices hit fresh lows FIGURE 2 The Euro fell to its lowest level against the U.S. dollar since 2006 US$ per barrel Price of 1 Euro in USD 120 1.7 110 Euro versus dollar 1.6 100 90 1.5 Brent 80 WTI 1.4 70 60 1.3 50 1.2 40 30 1.1 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Jan-06 Jul-07 Jan-09 Jul-10 Jan-12 Jul-13 Jan-15 Source: Bloomberg. Source: Bloomberg. Produced by DECPG. Number 245 | January 9, 2015 Weekly Insight: Fiscal Policy Cyclicality Fiscal policy in Emerging and Frontier Market Economies has become more countercyclical since the 1980s. Many economies used their fiscal space during the Great Recession to implement larger fiscal stimulus than in earlier contractions and have not fully returned their debt and fiscal balances to pre-crisis levels. In the medium-term, developing economies will need to rebuild the fiscal space that is necessary to maintain countercyclical policy in the future. Many Emerging Market and Frontier Market Economies (EMEs and FMEs) implemented fiscal stimulus during the Great Recession of 2008-09. This stimulus was indicative of a broader trend among developing economies of fiscal policy countercyclicality. During recent downturns, governments in developing economies increased consumption or cut taxes to support activity instead of pursuing fiscal consolidation as they have in the past. Correlations between the cyclical components of government consumption and GDP from a cross-country sample indeed show that fiscal policy has become less procyclical since the 1990s, and more countercyclical since the Great Recession (Figure 3). High procyclicality between 1980 and 1999 in EMEs broadly turned to countercyclicality after the Great Recession, while procyclicality became less pronounced in FMEs. This evolution of fiscal cyclicality can be attributed to several factors, including improvements in policies, institutions, and enhanced financial market access. Countercyclical fiscal policy is associated with greater fiscal space . Many EMEs and FMEs built fiscal space in the run up to the Great Recession of 2008-09, by reducing debt and closing deficits. Throughout the 2000s, procyclicality was less pronounced in economies with wide fiscal space (Figure 4). During the Great Recession, economies with government debt below 40 percent of GDP (implying wider fiscal space) were able to implement greater fiscal stimulus than more indebted governments (with narrower space). Government debt remains moderate in many economies, but is above 40 percent on average for EMEs and FMEs. Fiscal deficits are also substantial and have yet to return to pre-crisis levels. Developing economies need to rebuild their fiscal space in the medium-term to keep countercyclical fiscal policy available. Financing costs are expected to increase from their currently low levels as unconventional monetary policy in advanced economies comes to an end. With tightening global financial conditions and slowdowns or reversals to capital flows constraining monetary policy in many economies, fiscal policy will become an important tool to stimulate activity during cyclical downturns. For many developing countries, the expected soft commodity prices are an opportunity to implement subsidy reforms to help rebuild fiscal space while, at the same time, removing longstanding distrosions to economic activity. FIGURE 3 Changing stance of fiscal policy FIGURE 4 Cyclicality of fiscal policy and fiscal space Correlations between government consumption and GDP Correlations between government consumption and GDP 0.8 1980-99 1.5 1980-99 2000-07 0.6 2008-14 1.0 2000-07 0.4 0.5 0.2 0.0 0 -0.2 -0.5 -0.4 2008-14 -1.0 -0.6 EME FME -1.5 Narrow fiscal Wide fiscal Narrow fiscal Wide fiscal EME FME space space space space Source: Global Economic Prospects January 2015. Source: Global Economic Prospects January 2015. Note: The figure presents correlations between the cyclical Note: The figure presents correlations between the cyclical components components of government consumption and GDP from an of government consumption and GDP from an unbalanced panel of unbalanced panel of annual data for 31 EMEs and 29 FMEs. annual data for 31 EMEs and 29 FMEs. The samples have been divided based on fiscal space. Positive correlations suggest procyclicality, while negative correlations suggest countercyclicality Number 245 | January 9, 2015 Major Data Releases Fri, 2 Jan - Thu, 8 Jan 2015 Upcoming releases: Fri, 9 Jan - Thu, 15 Jan 2015 Country Date Indicator Period Actual Forecast Previous Country Date Indicator Period Previous United States 1/2/2015 Construction Spending NOV -0.3% 0.5% 1.2% Germany 1/9/15 Industrial Production (Y/Y) NOV 0.8 % Germany 1/5/15 CPI (Y/Y) DEC 0.2 % 0.1 % 0.6 % United States 1/9/15 Unemployment Rate DEC 5.8 % United States 1/6/15 Factory Orders (M/M) NOV -0.7 % 0.17 % -0.7 % South Africa 1/12/2015 Manufacturing Production (Y/Y) NOV 2.2% Germany 1/7/15 Retail Sales (Y/Y) NOV -0.8 % 0.3 % 2.1% Gfrance 1/14/2015 CPI (Y/Y) DEC 0.30% Euro Area 1/7/2015 CPI (Y/Y) DEC -0.2% -0.1% 0.3% Eurozone 1/14/2015 Industrial Production (Y/Y) NOV 0.7% Euro Area 1/7/15 Unemployment Rate NOV 11.5 % 11.5 % 11.5 % Turkey 1/15/2015 Unemployment Rate OCT 10.7% Economic Developments indicators expressed as %ch y/y, except Industrial Production quarterly figures are %ch q/q, annualized 2013 2014 2014 2010 2011 2012 2013 Q3 Q4 Q1 Q2 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Industrial Production, S.A. World 9.0 4.7 3.0 2.6 4.0 4.5 3.5 2.0 3.9 3.8 3.6 3.5 3.4 3.3 2.5 3.4 3.1 2.5 High Income Countries 7.8 2.8 0.8 0.5 3.2 3.7 3.1 -0.3 3.2 3.0 2.8 2.2 2.1 2.3 0.9 1.6 1.7 1.6 Developing Countries 10.9 7.8 6.3 5.5 5.2 5.6 4.1 5.2 4.8 4.9 4.6 5.2 5.3 4.8 4.8 5.9 5.1 3.9 East Asia and Pacific 14.2 11.3 9.0 8.9 10.5 10.1 4.3 8.0 7.7 7.5 7.9 8.1 8.6 7.8 6.6 7.7 7.3 5.5 East Asia x. China 8.9 0.7 4.1 4.7 3.6 5.8 -1.9 7.5 2.8 0.7 2.7 3.8 4.6 1.0 4.9 6.4 5.6 -6.9 Europe and Central Asia 10.8 13.1 9.1 2.2 7.5 4.0 5.1 1.0 4.3 4.7 3.6 5.8 3.8 3.8 2.6 2.7 2.6 - Latin America and Caribbean 6.3 2.6 -0.1 1.0 -2.6 -3.1 0.1 -3.1 0.7 1.7 -2.2 -1.3 -3.0 -1.9 -1.2 -1.5 -1.1 - Middle East and N. Africa 2.2 -10.1 6.3 -7.9 -35.6 -12.6 14.0 2.4 -9.4 -12.7 -12.7 -10.2 -6.8 -2.7 10.1 18.5 11.8 14.4 South Asia 9.3 5.4 1.1 1.7 10.1 -3.2 6.9 5.3 -1.0 0.1 4.2 5.3 4.5 1.5 2.0 2.8 -3.0 - Sub-Saharan Africa 4.4 3.4 3.5 0.9 -7.3 8.1 -5.1 -2.1 1.5 1.2 -2.3 -3.5 0.6 -7.7 -0.6 8.4 2.1 - Inflation, S.A. 1 High Income Countries 1.7 2.8 2.0 1.6 1.7 1.4 1.4 2.0 1.3 1.5 2.0 2.0 2.0 1.9 1.7 1.7 1.7 1.5 Developing Countries 5.8 7.5 6.5 7.4 7.6 7.9 7.5 7.7 7.3 7.5 7.5 7.9 7.8 8.0 8.1 7.9 7.8 7.8 East Asia and Pacific 3.4 5.6 2.8 3.0 3.3 3.4 2.9 2.9 2.7 3.0 2.5 3.1 3.0 2.8 2.5 2.2 2.1 2.2 Europe and Central Asia 7.3 8.2 8.7 6.2 6.2 5.5 5.8 7.4 5.7 6.2 7.1 7.6 7.5 7.7 8.1 8.1 8.3 8.4 Latin America and Caribbean 6.4 7.5 6.7 9.8 10.3 11.7 12.5 13.9 12.4 12.9 13.6 13.9 14.2 15.0 15.5 16.0 16.3 16.7 Middle East and N. Africa 7.0 11.9 14.4 18.6 19.9 16.8 13.2 9.7 12.7 11.3 10.1 9.8 9.1 9.9 10.2 10.2 10.6 10.6 South Asia 10.2 9.8 9.5 9.6 9.3 10.1 8.2 8.0 7.9 8.2 8.4 8.1 7.4 7.8 7.5 6.5 5.5 4.4 Sub-Saharan Africa 7.6 10.1 11.3 8.2 7.4 8.3 8.9 9.7 8.8 9.0 9.2 9.7 10.1 10.1 10.2 9.1 7.8 7.6 1 Inflation is calculated as the GDP-weighted average for all groups. Trade and Finance indicators expressed as %ch y/y, except International Reserves are %ch p/p and trade quarterly figures are %ch q/q, annualized 2013 2014 2014 2010 2011 2012 2013 Q3 Q4 Q1 Q2 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Exports, Nominal, US$, S.A. World 22.0 19.2 0.2 2.0 3.5 9.3 -3.3 5.5 -0.7 3.0 2.9 4.3 3.7 6.3 1.1 3.0 -1.0 - High Income Countries 19.4 18.6 -1.1 1.3 4.4 7.3 -0.5 3.6 2.3 5.3 3.8 4.4 2.8 5.4 -0.3 1.0 -3.1 - Developing Countries 28.5 20.6 3.3 3.5 1.3 14.2 -9.5 9.9 -7.4 -2.1 1.0 4.0 5.8 8.2 4.2 7.5 3.8 -0.3 East Asia and Pacific 30.8 19.7 6.1 6.0 -3.3 23.7 -11.1 13.3 -12.8 -3.6 1.8 4.9 7.7 11.7 8.5 13.7 9.7 3.8 Europe and Central Asia 15.6 20.3 -0.2 -0.3 14.0 5.5 5.4 -4.0 2.5 8.9 3.2 6.3 5.7 7.3 -4.4 -0.1 - - Latin America and Caribbean 28.4 23.2 1.6 0.7 0.9 3.8 -11.2 9.5 2.3 -3.1 -0.9 0.8 1.6 5.2 -0.9 -0.6 -4.8 -9.3 Middle East and N. Africa 24.4 15.1 2.2 - - - - - - - - - - - - - - - South Asia 34.3 31.6 -1.8 6.3 43.6 1.6 -15.8 8.2 -3.4 1.1 3.8 9.2 9.4 3.4 1.0 -1.3 -5.6 7.1 Sub-Saharan Africa 34.4 18.3 -1.5 -0.3 -11.9 -7.7 -7.2 5.9 -3.8 -6.3 -8.5 -6.2 -1.5 - - - - - Imports, Nominal, US$, S.A. World 25.6 23.4 6.9 6.0 -2.2 6.3 -9.3 1.6 -2.4 -2.0 0.6 -4.1 0.4 3.5 -1.5 -2.6 -7.7 - High Income Countries 17.9 17.8 -1.0 0.3 7.4 7.2 3.1 2.3 2.5 7.6 4.4 4.3 6.3 5.5 0.1 1.7 -3.9 - Developing Countries 35.6 29.9 14.9 11.0 -9.1 5.7 -18.5 1.1 -6.3 -9.2 -2.3 -10.5 -4.3 2.0 -2.8 -6.0 -10.7 -3.8 East Asia and Pacific 37.4 24.2 5.6 5.8 5.6 5.4 -0.6 -12.8 6.2 -10.4 -2.1 -3.9 3.5 -2.7 -1.0 6.7 3.1 -5.1 Europe and Central Asia 20.6 27.1 -0.2 2.9 6.8 3.7 -13.9 -6.6 -4.2 -0.8 -6.0 -2.0 -0.4 -7.2 -4.2 -4.9 -6.5 - Latin America and Caribbean 29.0 22.5 3.8 2.9 -7.6 0.5 5.7 -5.5 -0.6 2.7 -4.9 -2.6 2.3 -1.7 -2.4 5.6 -5.2 -0.9 Middle East and N. Africa 14.9 17.0 9.9 - - - - - - - - - - - - - - - South Asia 33.9 31.4 4.0 -3.9 -21.4 -9.5 11.9 6.9 -14.4 2.2 -9.5 -10.0 8.8 4.2 7.1 23.1 6.9 24.3 Sub-Saharan Africa 39.0 33.8 21.9 15.4 -13.1 7.1 - - - - - - - - - - - - International Reserves, US$ High Income Countries 10.2 11.3 9.2 3.6 2.4 1.1 0.8 0.7 0.5 0.3 0.0 0.3 0.5 -0.4 -0.1 -1.3 -0.7 0.1 Developing Countries 15.6 10.5 5.2 8.2 3.0 2.7 1.8 1.5 0.8 0.7 1.0 0.1 0.4 -0.1 -0.1 -1.7 - - East Asia and Pacific 19.3 11.9 4.5 12.2 4.1 3.7 3.0 1.2 1.1 0.8 0.9 0.1 0.3 -0.5 0.1 -2.1 - - Europe and Central Asia 9.3 5.5 7.8 3.6 1.5 2.0 -2.9 3.4 0.6 0.6 1.6 0.7 1.0 -1.1 1.1 -1.7 -2.0 -0.9 Latin America and Caribbean 16.2 16.3 8.4 -1.1 0.4 -1.2 0.2 3.4 -0.1 0.1 1.6 0.6 1.2 1.1 0.0 0.1 -0.1 0.7 Middle East and N. Africa 6.1 3.0 5.9 3.0 2.3 -0.4 -1.8 -2.3 0.1 -0.7 -0.8 -0.8 -0.7 -0.1 -1.3 -1.7 - - South Asia 6.1 -0.9 0.4 -0.2 -2.4 6.5 3.7 5.6 1.7 3.3 2.9 1.0 1.6 1.3 -0.4 -1.4 0.5 -0.2 Number 245 | January 9, 2015 Financial Markets 1 2013 2014 2014 MRV Chg since 2010 2011 2012 2013 Q4 Q1 Q2 Q3 Jun Jul Aug Sep Oct Nov Dec Sep-12 '08 3 Interest rates and LIBOR (%) U.S. Fed Funds Effective 0.18 0.10 0.14 0.11 0.09 0.07 0.09 0.09 0.10 0.09 0.09 0.09 0.09 0.09 0.12 0.12 -1.98 ECB repo 1.00 1.25 0.88 0.55 0.35 0.25 0.22 0.11 0.16 0.15 0.12 0.05 0.05 0.05 0.00 0.05 -4.20 US$ LIBOR 3-months 0.34 0.34 0.43 0.27 0.24 0.24 0.23 0.23 0.23 0.23 0.24 0.23 0.23 0.23 0.25 0.25 -2.57 EURIBOR 3-months 0.75 1.34 0.49 0.15 0.20 0.27 0.27 0.13 0.21 0.17 0.16 0.06 0.06 0.06 0.00 0.06 -4.89 US 10-yr Treasury yield 3.20 2.77 1.78 2.33 2.73 2.75 2.61 2.49 2.59 2.52 2.43 2.51 2.32 2.30 2.19 2.10 -1.62 German Bund, 10 yr 2.78 2.65 1.57 1.63 1.79 1.68 1.43 1.07 1.35 1.20 1.02 1.00 0.87 0.79 0.64 0.45 -3.74 Spreads (basis points) JP Morgan Emerging Markets 301 341 342 319 342 352 300 301 282 282 310 312 349 350 402 446 89 Asia 206 218 216 219 237 231 197 195 189 195 202 187 207 193 206 231 -65 Europe 247 301 320 267 290 301 265 262 236 244 274 270 295 293 368 433 120 Latin America & Caribbean 360 404 393 379 409 429 360 366 343 336 373 390 443 455 516 558 170 Middle East 342 366 449 435 428 408 376 369 360 372 379 358 395 388 411 445 -53 Africa 274 364 337 322 338 332 287 280 278 278 292 270 307 306 343 396 396 Stock Indices (end of period) 2 Global (MSCI) 331 300 340 409 409 411 429 417 429 423 432 417 419 426 417 416 30.0 High-Income ($ Index) 1280 1183 1339 1661 1661 1674 1743 1698 1743 1714 1749 1698 1708 1740 1710 1705 32.9 United States (S&P-500) 1258 1258 1426 1848 1848 1872 1960 1981 1960 1931 2003 1981 2018 2068 2059 2058 64.4 Euro Area (S&P-350$) 1124 1005 1143 1339 1339 1361 1401 1411 1401 1380 1404 1411 1382 1425 1401 1396 20.8 Japan (Nikkei-225) 10229 8455 10395 16291 16291 14828 15454 16174 15454 15621 15425 16174 16756 17460 0 17451 42.9 Developing Markets (MSCI) 1151 916 1055 1003 1003 995 1051 1005 1051 1066 1088 1005 1016 1005 956 954 11.5 EM Asia 468 379 447 446 446 444 472 460 472 485 489 460 467 467 457 460 40.5 EM Europe 529 395 473 438 438 409 435 374 435 403 399 374 369 353 297 297 -41.6 EM Europe & Middle East 450 336 402 372 372 348 360 321 360 340 337 321 314 303 257 258 -37.1 EM Latin America & Caribbean 4614 3602 3798 3201 3201 3194 3370 3171 3370 3399 3664 3171 3158 3008 2728 2637 -25.4 Exchange Rates (LCU / USD) High Income Euro Area 0.76 0.72 0.78 0.75 0.73 0.73 0.73 0.76 0.74 0.74 0.75 0.78 0.79 0.80 0.81 0.83 18.5 Japan 87.76 79.74 79.85 97.61 100.51 102.78 102.14 104.04 102.07 101.75 102.98 107.39 108.02 116.40 119.37 120.50 11.6 Developing Brazil 1.76 1.67 1.95 2.16 2.28 2.37 2.23 2.28 2.23 2.22 2.27 2.34 2.45 2.55 2.65 2.69 51.3 China 6.77 6.46 6.31 6.15 6.09 6.10 6.23 6.16 6.23 6.20 6.15 6.14 6.13 6.13 6.19 6.21 -9.3 Egypt 5.63 5.94 6.07 6.87 6.89 6.96 7.07 7.15 7.15 7.15 7.15 7.15 7.15 7.15 7.15 7.16 32.0 India 45.73 46.67 53.41 58.55 62.00 61.79 59.90 60.65 59.76 60.06 61.01 60.87 61.50 61.79 62.80 63.30 38.5 Russia 30.37 29.41 31.06 31.86 32.56 35.07 34.96 36.31 34.37 34.75 36.17 38.01 40.96 46.27 56.28 58.75 130.1 South Africa 7.32 7.26 8.21 9.65 10.16 10.86 10.54 10.77 10.68 10.66 10.66 10.99 11.06 11.10 11.53 11.68 46.2 Memo: USA nominal effective rate 100.19 98.53 102.00 104.77 106.31 108.33 108.68 110.57 109.31 109.43 110.61 111.67 112.66 113.83 0.00 115.62 20.7 1 MRV = Most Recent Value. 2 MSCI Indices for Asia, Africa, and Europe and C. Asia, for 2008 are calculated from February-December, due to data availability. 3 Change expressed in levels for interest rates and spreads; percent change for stock market and exchange rates. Commodity Prices 2013 2014 2014 MRV Chg since 2010 2011 2012 2013 Q4 Q1 Q2 Q3 Jun Jul Aug Sep Oct Nov Dec Sep-12 '08 3 1 Oil price, $/b, nominal 79 104 105 104 105 104 106 100 108 105 100 96 86 77 61 50 -48.2 Non - Oil Index 2 .. 97 85 79 75 76 78 73 76 75 74 71 70 71 69 69 .. Food Index 2 .. 99 97 89 85 86 89 75 86 79 76 72 72 76 75 74 .. 3 Metals and Minerals Index 103 117 99 94 92 88 87 89 87 90 90 87 84 84 80 82 -20.8 Baltic Dry Index 4 2755 1545 916 1215 1876 1375 983 948 912 796 948 1101 1096 1328 880 758 -84.2 1 Simple average of Brent, Dubai and WTI. 2 Base Date = Jan 3, 2011 due to data availability. The Index component combination in the Weekly tables differs from that of the Pink Sheet. 3 Base Date = Jan 4, 2010 due to data availability. The Index component combination in the Weekly tables differs from that of the Pink Sheet. 4 Base Date = May 1, 1985 Number 245 | January 9, 2015