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Development Trends - The Monthly

This monthly background note is prepared for review by the Bank's Short-term Risk Monitoring Group (STRMG), and later distributed to a wider internal Bank audience and the Board of Executive Directors. The note helps to keep readers informed on high-frequency developments in areas that are crucial for setting the global environment for growth among developing countries:


Global economic activity is strengthening, but progress is very uneven.  Developing countries (including China, Brazil and India) have been leading the upswing in economic activity with industrial production strong at a 5.8 percent annualized pace in Q3. In China, GDP expanded by 9.1% (q/q, annualized) up from 8.2% in Q2 with the services sector recording the fastest growth. Among high-income countries the situation is more nuanced. In the United States Q3 GDP growth accelerated to 2.0% (q/q, annualized) up from 1.3% in Q2, supported by strong growth in residential investment (14.4%) reflecting the pick-up in the housing market.

²Private capital flows to developing countries remain high, despite easing in October. Supporting the expected strengthening of real-side activity in developing countries in Q4, gross international capital flows to developing countries equaled $49 billion in October, the second highest inflow over the past 15 months, but down from the record $71bn of inflows during September. Euro Area debt turmoil in May caused capital flows to slow, but stabilization of financial market tensions and high-income monetary policy prompted the recent uptick in flows. Bond issuance was particularly strong at $32 billion in October, with 44% of the total destined for the financial sector.
²The overall picture of a picture of a hesitant firming of activity continues to be challenged by the downside risks. Increasingly the US fiscal cliff is of concern, with mounting evidence that it is impacting growth and investment already in Q3 and Q4 as firms hesitate to invest prior to a policy induced recession in 2013 H1.  Reflecting these concerns, equity markets have declined and “safe haven” bonds have performed better in recent weeks. By our estimations, if the fiscal cliff materializes, the US economy will be thrown back into a recession in 2013 (-0.2% GDP growth). Direct impacts on the developing countries GDP growth range between a decline of 0.6 and 1.3 percentage points, with East Asia and Latin America regions and oil exporters being amongst the hardest hit.
²Were external conditions to deteriorate, some developing countries have room for policy easing to support domestic demand, but others with higher inflation are more constrained. Subdued inflation rates relative to central bank targets (or historical averages) in China, Malaysia, Chile, Colombia and Indonesia indicate some space to reduce policy rates to support domestic demand and growth were an external shock to arise from a US “fiscal cliff” situation or an escalation of Euro Area debt tensions. But in spite of a recent downtick in food and crude oil prices, inflation remains high relative to targets (or historical averages) in Turkey, India, Mexico, and South Africa.

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