89657 DECPG Weekly Global Economic Brief Number 102 For more information, see www.worldbank.org/gem 28 July 2011 The ongoing debt-limit debate and disappointing growth reports weighed on the U.S. dollar and equities this week. However, U.S. Treasuries remained resilient as yields held relatively steady. Investors appear more concerned about negative spillover-impacts on growth of a potential default, abrupt spending cuts, and/or credit-rating downgrade than about bond coupon-payments being honored. Worries center on the risks of prolonging the current soft-patch in growth, or on the downside of recession. Global activity slowed markedly in Q2-2011, as reflected in ongoing deterioration in the global PMI manufacturing and services surveys in June—despite the sharp post-Tohoku rebound in Japan and some easing of inflationary pressures. Global PMI new-order surveys also fell on concerns that policy-turmoil and deepening fiscal consolidation in the Euro Area and the United States could undermine growth, and that several developing countries could see a slowdown given tighter monetary policy aimed at curbing inflation. Gross capital inflows to developing countries fell in June, as bond and equity inflows faltered on a flight-to-quality. Still, total inflows nearly doubled in 1H-2011 from a year-prior—buoyed by bank-lending—and likely contributed to strong credit growth in some countries. Debt-debate weighs on US$ and equities, given worries about negative growth impacts The US-dollar and equities fell this week on mounting concerns Swiss franc/US$ exchange rate, S&P 500 index of a credit-rating downgrade, abrupt spending cuts or temporary 1.00 Swiss franc/US$, LHS S&P 500, RHS 1370 default—and associated negative growth impacts. Investors 0.95 1350 turned to safe-haven assets, including the Swiss franc and gold, 1330 which appreciated to record highs against the dollar during the 0.90 week. The cost of insuring against a U.S. sovereign default also rose, 1310 0.85 reaching a …-month high (5-yr. CDS). Reports from the Commerce 1290 Department, that U.S. durable goods orders contracted 0.80 1270 unexpectedly (2.1%, m/m) in June, and from the Federal Reserve, that the slowdown in U.S. growth broadened through mid-July over 0.75 1250 mid-June, contributed to market jitters. In contrast, Treasuries Jan-2011 Mar-2011 May-2011 Jul-2011 Sources: Thomson Datastream and World Bank DEC Prospects Group remained relatively stable, partly reflecting weaker growth prospects as well as apparent confidence that U.S. interest and principal payments will be met. While market confidence has Global manufacturing and services surveys remained relatively strong, it could quickly deteriorate if suggest growth slowdown persisted in June political gridlock drags on. purchasing managers index (PMI), points, and industrial output, % 60 15 Global PMI surveys for manufacturing and services suggest global 10 growth slowed in Q2-2011. These declines are underscored by the 55 5 new orders components, which are down a pronounced 8.8 and 6.0 50 0 points for manufacturing and services, respectively, since January Global manufacturing PMI - LHS -5 2011. Moreover, the ratio of new orders to finished goods 45 -10 Global services PMI - LHS components for manufacturing declined over the same period, 40 Readings below 50 suggest contraction - LHS -15 suggesting continued inventory adjustment to softer demand. PMI -20 Global IP volume growth, % 3m/3m - RHS manufacturing surveys are down from earlier-peaks in 2011 in 27 35 -25 of 28 countries (mostly high-income) with current data. All BRICs Mar-09 Aug-09 Jan-10 Jun-10 Nov-10 Apr-11 saw lower June readings on monetary policy tightening, slowing Sources: Thomson Datastream and World Bank DEC Prospects Group foreign demand and heightened uncertainty, with Brazil’s manufacturing PMI flagging a mild contraction, and Russia and Gross capital inflows to developing China’s pointing to marginal growth. countries remain strong in 1H-2011 $US-billions 180 Despite a fall-off in June, gross capital inflows to developing 160 Bank 1H-2010 1H-2011 Equity countries rose 41% above year-earlier levels in 1H-2011, with bank 140 Bonds lending up 57%. Inflows slowed to $40 bn in June from $51 bn in 120 100 May, as bonds and equities faltered on a flight-to-quality given 80 heightened uncertainty in Europe. But bank lending held steady, as 60 volatile international market conditions prompted some borrowers 40 to switch to syndicated loans. While bank-lending remains well 20 0 below pre-crisis peaks, emerging market corporates have started 2009-Q1 2009-Q3 2010-Q1 2010-Q3 2011-Q1 tapping the syndicated loan market again. Bond issuance has been Sources: Dealogic and World Bank DEC Prospects Group robust as well this year, with Latin America accounting for 40% of total issuance. The material presented here and on the GEM website is a product of the staff of the World Bank. The findings, interpretations, and conclusions expressed herein do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the governments they represent. Content is not for quotation unless specifically authorized in writing by the World Bank. For permission, please contact pubrights@worldbank.org. Economic Developments indicators expressed as %ch y/y, except Industrial Production quarterly figures are %ch q/q, annualized 28-Jul-11 2010 2011 2011 2008 2009 2010 Q3 Q4 Q1 Q2 Feb Mar Apr May Jun Industrial Production, S.A. World 0.4 -8.5 9.1 0.7 7.9 8.6 - 6.9 4.4 2.6 5.9 - High Income Countries -2.0 -12.9 8.1 -0.4 5.1 6.4 - 5.9 2.3 0.4 4.3 - Developing Countries 6.0 0.9 10.9 2.8 13.2 12.7 - 8.8 8.3 6.7 - - East Asia and Pacific 10.7 8.4 14.5 6.2 17.1 18.6 - 12.4 12.8 11.4 - - East Asia x. China 2.3 -4.3 8.7 -7.2 13.9 3.2 - 2.1 2.5 -0.4 2.1 - Europe and Central Asia 0.1 -10.1 9.5 -0.9 19.2 8.8 -1.3 8.8 6.9 5.2 6.2 7.0 Latin America and Caribbean 1.0 -7.0 6.5 0.2 4.8 10.3 - 5.6 4.4 2.1 4.8 - Middle East and N. Africa 3.1 -3.5 1.6 -6.0 6.0 -18.0 - -4.6 -10.7 -9.0 - - South Asia 6.8 -0.2 9.3 3.6 11.0 12.4 - 6.2 8.7 4.2 5.1 - Sub-Saharan Africa 1.0 -6.7 5.6 -7.8 -3.4 6.2 - 0.9 -1.8 -3.9 - - Inflation, S.A. 1 High Income Countries 4.3 1.2 1.9 1.9 2.5 3.3 3.5 3.4 3.5 3.4 3.5 3.4 Developing Countries 10.3 4.0 4.4 4.0 5.0 5.2 - 5.3 5.8 6.2 6.5 - East Asia and Pacific 9.5 1.5 4.0 3.7 4.2 5.1 - 4.9 5.4 5.0 5.5 - Europe and Central Asia 10.2 3.1 6.5 6.8 7.6 7.5 8.3 7.1 7.7 8.4 8.5 6.3 Latin America and Caribbean 8.8 3.3 4.4 4.0 5.3 3.3 2.9 5.6 5.9 6.3 6.5 6.5 Middle East and N. Africa 10.8 3.4 4.2 3.7 4.9 - - 2.9 2.9 4.5 - - South Asia 10.9 10.8 10.0 9.1 9.2 9.7 - 9.7 10.5 10.7 9.6 - Sub-Saharan Africa 10.4 7.5 4.0 3.0 3.8 5.0 - 5.1 5.8 6.7 7.2 - 1 Inflation is calculated as medians 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 2010 2011 2011 2008 2009 2010 Q3 Q4 Q1 Q2 Feb Mar Apr May Jun Exports, Nominal, US$, S.A. World 15.2 -22.8 22.3 1.8 43.8 47.4 - 21.0 23.4 22.3 28.4 - High Income Countries 12.6 -22.9 18.8 3.6 38.9 45.6 - 20.7 20.5 19.4 28.5 - Developing Countries 21.1 -22.6 29.9 -1.7 53.9 50.9 - 21.4 29.4 28.2 28.2 - East Asia and Pacific 16.8 -16.4 30.9 -0.6 39.2 35.5 20.1 9.0 31.6 29.3 19.8 18.9 Europe and Central Asia 31.0 -32.7 27.1 -17.6 89.6 83.2 - 31.4 32.1 37.7 37.7 - Latin America and Caribbean 11.7 -20.3 28.5 6.8 48.3 39.2 - 27.8 24.4 21.2 30.3 - Middle East and N. Africa 33.9 -33.9 29.9 13.1 58.9 57.5 - 32.2 18.3 - - - South Asia 24.9 -11.5 28.5 -6.7 112.2 84.9 - 49.0 46.5 35.5 55.5 - Sub-Saharan Africa 28.6 -30.8 34.3 -8.8 61.1 101.0 - 38.3 24.2 - - - Imports, Nominal, US$, S.A. World 15.7 -23.4 21.6 1.3 38.6 52.8 - 21.6 21.9 21.0 28.7 - High Income Countries 12.1 -24.6 18.0 1.9 31.4 48.9 - 20.5 19.8 20.0 27.3 - Developing Countries 25.4 -20.4 30.1 -0.1 55.0 61.1 - 24.2 26.4 23.1 31.6 - East Asia and Pacific 21.3 -15.4 37.6 -6.2 81.6 60.5 -15.4 21.1 27.5 23.6 27.8 18.5 Europe and Central Asia 27.1 -33.5 27.1 17.4 60.3 73.6 - 42.2 40.9 37.3 41.7 - Latin America and Caribbean 22.2 -24.7 29.1 2.6 25.2 49.5 28.2 27.2 22.3 19.9 30.6 25.5 Middle East and N. Africa 39.1 -8.5 14.2 2.8 36.4 23.5 - 10.4 8.2 - - - South Asia 38.7 -17.2 27.6 -7.6 20.0 122.5 - 22.5 25.9 15.2 52.6 - Sub-Saharan Africa 25.9 -18.5 14.4 7.1 37.8 38.8 - 14.5 17.0 - - - International Reserves, US$ High Income Countries 5.8 15.8 10.8 5.7 0.4 3.9 - 0.7 2.1 2.3 0.6 - Developing Countries 12.5 14.8 14.6 7.6 4.8 6.0 - 1.8 1.8 3.5 0.4 - East Asia and Pacific 23.5 22.6 19.3 8.2 7.5 7.0 5.3 2.1 2.0 3.9 0.6 1.0 Europe and Central Asia -8.9 2.1 7.5 7.7 -2.1 6.0 - 1.6 2.2 3.8 -0.6 - Latin America and Caribbean 11.3 10.3 15.6 7.6 4.3 6.2 - 2.3 1.6 2.5 1.1 - Middle East and N. Africa 22.6 5.1 5.9 6.2 1.9 - - - - - - - South Asia -9.0 11.0 5.6 6.1 1.5 2.8 - 1.0 1.0 2.5 -1.1 - Sub-Saharan Africa 8.0 2.2 0.7 3.5 0.0 6.4 - 0.9 2.7 - - - Weekly Global Economic Brief - 28 July 2011 2 Financial Markets 28-Jul-11 2008 2009 2010 2010 2011 2011 MRV 1 Chg since Q3 Q4 Q1 Q2 Feb Mar Apr May June Sep-12 '08 3 Interest rates and LIBOR (%) U.S. Fed Funds Effective 1.93 0.16 0.18 0.19 0.19 0.16 0.19 0.16 0.14 0.10 0.09 0.09 0.07 -2.03 ECB repo 3.78 0.70 0.48 0.50 0.69 0.78 1.14 0.79 0.89 1.07 1.14 1.23 1.22 -3.15 US$ LIBOR 3-months 2.91 0.69 0.34 0.39 0.29 0.31 0.26 0.31 0.31 0.28 0.26 0.25 0.25 -2.56 EURIBOR 3-months 4.63 1.23 0.81 0.87 1.02 1.09 1.41 1.09 1.18 1.32 1.43 1.49 1.61 -3.35 US 10-yr Treasury yield 3.65 3.24 3.20 2.77 2.85 3.45 3.19 3.57 3.41 3.43 3.15 2.99 2.98 -0.75 German Bund, 10 yr 3.99 3.24 2.76 2.44 2.60 3.17 3.12 3.22 3.24 3.35 3.08 2.92 2.62 -1.56 Spreads (basis points) US Corporate (High Yield Bonds) 915 1011 538 577 521 427 436 404 418 396 426 485 483 -250 JP Morgan Emerging Markets 406 472 301 315 285 289 305 286 297 296 305 314 297 -61 Asia 355 374 206 200 172 181 196 180 189 192 196 199 173 -123 Europe 370 449 247 268 232 230 239 227 231 223 240 254 255 -58 Latin America & Caribbean 426 510 360 374 347 352 379 348 364 371 379 388 361 -27 Middle East 585 574 342 380 339 309 331 313 321 309 334 350 338 -160 Africa 452 431 274 324 294 362 304 371 362 298 297 317 320 -15 2 Stock Indices (end of period) Global (MSCI) 228 299 331 305 331 344 342 345 344 357 348 342 339 6.0 High-Income ($ Index) 920 1168 1280 1179 1280 1335 1331 1352 1335 1389 1355 1331 1319 2.8 United States (S&P-500) 903 1115 1258 1141 1258 1326 1321 1327 1326 1364 1345 1321 1305 4.2 Euro Area (S&P-350$) 1039 1358 1353 1302 1353 1436 1451 1453 1436 1544 1480 1451 1402 -4.7 Japan (Nikkei-225) 8860 10546 10229 9369 10229 9755 9816 10624 9755 9850 9694 9816 9901 -18.9 Developing Markets (MSCI) 458 783 912 851 912 925 905 876 925 951 922 905 907 30.1 Asia 457 778 906 848 906 917 909 856 917 950 933 909 921 45.1 Europe & C. Asia 434 616 635 629 635 702 708 671 702 768 731 708 672 -10.5 Latin America & Caribbean 2078 4117 4614 4382 4614 4632 4464 4486 4632 4634 4486 4464 4263 20.6 Africa 567 815 1049 937 1049 1008 983 975 1008 1050 1004 983 985 28.3 Exchange Rates (LCU / USD) High Income Euro Area 0.68 0.72 0.76 0.77 0.74 0.73 0.69 0.73 0.71 0.69 0.70 0.69 0.70 -0.9 Japan 103.37 93.53 87.80 85.84 82.51 82.31 81.68 82.52 81.81 83.26 81.28 80.49 77.67 -27.7 Developing Brazil 1.83 2.00 1.76 1.75 1.70 1.67 1.59 1.67 1.66 1.58 1.61 1.59 1.57 -12.2 China 6.95 6.83 6.77 6.77 6.66 6.58 6.50 6.59 6.57 6.53 6.50 6.47 6.44 -5.9 Egypt 5.44 5.55 5.64 5.70 5.76 5.87 5.95 5.88 5.93 5.96 5.95 5.95 5.96 9.5 India 43.52 48.42 45.73 46.48 44.85 45.28 44.72 45.44 44.97 44.39 44.93 44.84 44.08 -3.6 Russia 24.88 31.76 30.38 30.60 30.71 29.27 27.99 29.25 28.41 28.05 27.94 27.98 27.60 7.9 South Africa 8.26 8.43 7.32 7.32 6.90 7.00 6.79 7.18 6.90 6.72 6.86 6.79 6.70 -16.9 Memo: USA nominal effective rate 84.39 86.30 83.47 83.68 80.56 79.55 77.47 79.65 78.43 77.72 77.44 77.23 77.23 -10.1 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 2008 2009 2010 2010 2011 2011 MRV Chg since Q3 Q4 Q1 Q2 Feb Mar Apr May June Sep-12 '08 3 Oil price, $/b, nominal 1 97 62 79 76 85 100 110 98 109 117 108 106 109 11.6 Non - Oil Index 2 199 151 196 191 229 259 250 266 256 258 246 245 248 24.7 Food Index 2 218 175 199 196 239 264 259 269 260 260 256 259 259 22.2 Metals and Minerals Index 2 188 127 189 181 210 234 227 241 231 236 224 222 234 26.2 Baltic Dry Index 3 6348 2598 2755 2358 2330 1364 1373 1180 1493 1331 1354 1433 1296 -73.0 1 Simple average of Brent, Dubai and WTI. 2 Base Date = Jan 1, 2005 3 Base Date = May 1, 1985 Weekly Global Economic Brief - 28 July 2011 3