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Global issues

Commodity prices under downward pressures;

global trade continues to be subdued

Te global economy continued to expand at a subdued pace in the rstquarter o 2013. Te euro area is still in a recession and the recovery hasbeen eeble in most other developed countries. In addition, many emerg-ing economies, including Brazil, China, India and the Russian Federation,are growing below pre-crisis levels and exhibiting major diculties. Teweak global demand is aecting the perormance o trade and the evolu-

tion o world market prices or primary commodities.Primary commodities prices decreased in early 2013, though they re-main at comparatively high levels in historical terms. Agricultural commodities prices ell by almost 5 per cent between March 2013and December 2012, ollowing relatively eeble global demand and higher supply or some key staples. Expected urther improve-ments in harvests in the next months may soten commodities prices urther this year, particularly in maize, soybeans and wheat.Prices or minerals and metals ell by 3 per cent between March 2013 and December 2012, driven by the slowing demand romChina. In the near term, downward pressures on prices are likely to intensiy as supplies increase more signicantly (especially by theend o 2013 or items like copper and aluminium) and investment demand in China moderates urther. Oil prices also decreased earlythis year, particularly in March and April, supported by Saudi Arabias activation o signicant spare capacity in 2012, rising supplyrom the United States and Iraq, and weak oil demand.

Te global merchandise o trade barely expanded over the rst quarter o 2013, with the three-month average growth decelerat-ing below 1 per centa consequence o a sluggish global aggregate demand. Ater growing slightly in January, global goods tradeell again in February as import demand contracted in the

euro area as well as Central and Eastern Europe and UnitedStates. Chinese data indicated a strong rebound in March a-ter a two-month decline in import demand, which also illus-trates the unstable push provided by emerging economies toglobal trade. In the near term, import demand is expected togradually improve in developed countries and to moderatelypick-up in most developing regions, particularly in East Asiaand Latin America and the Caribbean. Global trade is pro-jected to recover, though only modestly this year, and as suchwill not be a strong engine o growth or the global economy.

Developed economies

The United States: noticeable growthor the rst quarter

Te advance estimate or the gross domestic product (GDP)o the United States shows an annualized growth o 2.5 percent in the rst quarter o 2013, a noticeable improvementrom the 0.4 per cent or the ourth quarter o 2012. Pri-vate consumption and gross private investment were the two

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Note for the Secretary-General prepared under the general guidance of ASG Shamshad Akhtar by a team in Global Economic Monitoring Unit including

Pingfan Hong (Chief), Sebastian Vergara (coordinator), Clive Altshuler, Grigor Agabekian, Hung-Yi Li, Matthias Kempf, Ingo Pitterle, Pierre Kohler and John

Winkel, supported by Mary Lee Kortes, Nancy Settecasi, Leah C. Kennedy, Cordelia Gow, and Ann Dlima.

Contact email: hong@un.org, http://www.un.org/en/development/desa/policy/wesp/wesp_mb.shtml

Development Policy and Analysis Division w Department of Economic and Social Affairs

World Economic Situation and ProspectsMonthly Briefng

Summary

Commoditypricesdeclineasglobaltrade

remainsweak

TheECBcutsinterestrates,returningtocon-

ventionalmonetarypolicy

EconomicmomentumweakensinEastAsia;

furtherinterestratecutsinIndia

No. 54 16 May 2013

Source:World Bank.

Figure: Commodity prices: monthly indices based onnominal US dollars, 2002-2013

Index: 100 = 2005

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Agricultural commodities Metals Brent oil

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2 Monthly Briefing on the World Economic Situation and Prospects

major contributors or the expansion. Residential investment and private consumption o durable goods have maintained a stronggrowth or the past ew quarters. On the other hand, the real outlay rom the Government diminished by more than 4 per cent.

Spending on national deence showed the largest decrease among all types o government expenditures.Te labour market in the United States continues to recover, as non-arm payroll employment increased by 165,000 in April. Te

increase was concentrated mainly in the services sector, while little increase was registered or the payrolls in the construction andmanuacturing sectors. Government payrolls continued to decline marginally. Te average workweek or private non-arm workers

declined by 0.2 per cent rom the previous month while the average hourly earnings increased by 0.2 per cent. Te unemployment ratedecreased to 7.5 per cent aga inst the backdrop o an unchanged labour orce participation ratio. Te share o long-term unemployment

declined by 2.2 percentage points to 37.4 per cent, the lowest level since 2009.

Japan: initial efects o QQME appearing in nancial markets

Ater the Bank o Japan (BOJ) announced the Qualitative and Quantitative Monetary Easing (QQME) on 4 April, its impacts

have been seen in nancial markets. Te yields or Japanese government bonds (JGB) with more than 10 years to maturity havedeclined as intended. Nevertheless, the yields or shorter-term JGB rose owing to reduced purchases by the BOJ. Meanwhile, infa-

tion expectations observed in the nancial markets have also moved up, although it is still lower than the 2 per cent that the BOJhas targeted.

Te statistics or economic production or the rst three months were uneven, but most o them displayed noticeable quarter-over-

quarter expansion. Industrial production increased by 1.9 per cent in the rst quarter o 2013, and the export volume increased by 1.5

per cent over the same period. However, levels or those indicators were stil l much lower than one year ago. Te unemployment rateell to 4.1 per cent in March, partially owing to a reduction in the labour orce. In the rst quarter, employment slightly increased by0.3 per cent rom both one year ago and one quarter ago. Wages or regular workers have maintained their declining trend or the past

ew quarters and sustained the ongoing defation.

Western Europe: The ECB takes urther action

Te economic situation in Western Europe deteriorated again in April, with condence surveys registering another decline in senti-

ment and unemployment continuing to increase. Te European Central Bank (ECB) responded by returning to conventional policy,cutting its main renancing rate by a quarter o a percentage point to 0.5 per cent. It also reduced its marginal lending rate by 50

basis points to 1 per cent, but kept its deposit acility rate at zero. Tis narrowed the corridor bounded by these two rates to 100 basispoints, where it had been only briefy during the great recession. (ypically it is 200 basis points). It also avoided experimenting with

a negative interest rate or the deposit acility. However, there was a hint that the committee was open to a negative interest rate in

the uture.Tere were also announcements on unconventional policies. Te quantitative easing programmes o special liquidity acilities will

be maintained until at least mid-2014. It was also announced that the ECB will hold discussions with other European institutions

regarding improving credit fows to small- and medium-sized enterprises (SMEs) through the packaging o loans into asset-backed

securities. Tis would be designed to counteract the nancial ragmentation within the region, whereby rms in the crisis countries,particularly SMEs, are paying much higher rates o interest than rms elsewhere in the region.

New EU members: Slovenia sells bonds despite credit downgrade

In Poland, industrial output in March declined by 2.9 per cent year on year, increasing by 9.2 per cent month on month, however.In April, consumer sentiment indexes slightly improved in Poland, while worsening in the Czech Republic. In these two countries,

car manuacturing production declined in the rst quarter. Meanwhile, infation continued to subside in March, with 1 per centannual infation in Poland and only 0.1 per cent monthly infation in the Czech Republic, which triggered ears o defation. On

the back o low infation and weak domestic demand, the Hungarian National Bank again cut its policy rate in April, to a recordlow o 4.75 per cent, and announced a unding or lending program, aimed towards channelling $1.1 billion in loans to SMEs.

Although most o the Governments in the region have ollowed the scal austerity path, pro-growth measures are being sought torevitalize private investment. ax incentives or businesses were adopted in the Czech Republic and are being considered in Slovakia.

As portolio infows are gaining momentum and investors are trying to reduce their exposure to Japanese bonds, many o the newEuropean Union (EU) members enjoy record-low borrowing costs. In early May, Slovenia successully placed $3.5 billion worth o

bonds, despite its credit rating being downgraded by Moodys to junk ollowing a weak banking sector and a shaky scal position.

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3Monthly Briefing on the World Economic Situation and Prospects

Economies in transition

CIS and Georgia: disappointing rst quarter in the Russian Federation

In the Russian Federation, GDP growth slowed to a mere 1.1 per cent year on year in the rst quarter. However, some pick-up wasregistered in March, as industrial production increased by 2.6 per cent year on year despite ewer working days, and consumer senti-ment improved, ater two consequent months o decline. Growth may still strengthen in the second hal o 2013 i expectations o

a better harvest are realized.In Ukraine, the economy shrank by 1.3 per cent year on year in the rst quarter, while industrial output contracted by 5 per cent

year on year, as demand or its main manuacturing exports remains eeble. In Belarus, rst quarter GDP increased by 3.5 per cent,year on year, and the Central Bank cut its policy rate in March by 1 per cent. In the Caucasus, the Armenian economy registeredstrong industrial production growth and, according to the Government, double-digit GDP growth in the rst quarter o 2013. InAzerbaijan, the GDP in the rst quarter increased by 3.1 per cent year on year, mostly driven by the non-oil sectors, such as construc-tion and agriculture. In contrast, both oil and natural gas production contracted noticeably in the rst quarter, by 4.4 per cent and4.3 per cent year on year, respectively.

South-Eastern Europe: slight upturn in output, weak labour markets

In Serbia, the GDP in the rst quarter grew by 1.7 per cent year on year, the rst positive growth in ve quarters, mostly drivenby higher exports and increased production o car and uels. However, domestic demand remains weak and retail sales in the rstquarter declined by 15.5 per cent year on year in real terms. In April, Serbia secured a 10-year $500 billion loan rom the Russian

Federation or budget support, which also may be used to repay the countrys debt to the London Club. In Croatia, industrial pro-duction increased in March by 4.1 per cent year on year. In Bosnia and Herzegovina, industrial output rebounded in February, andexports in the rst quarter increased by 9.7 per cent year on year, although exports to the EU, the main export market, increased byonly 5.7 per cent. However, these positive developments still did not improve labour markets, as unemployment rates in the regionremain precariously high, with the rate o registered unemployment in Serbia close to 27 per cent in February.

Developing economies

Arica: Zambias maize output expected to all 30 per cent; no resolution in IMF-Egypt loan negotiations

In Botswana, the central bank unexpectedly reduced the benchmark interest rate by 50 basis points to 9.0 per cent in light o weakergrowth and the expectation o receding infation. Meanwhile, in Ghana, the domestic currency weakened urther on the back ouncertainty created by the scal and current account decits as well as dividend repatriation by oreign companies. In the agricul-

tural sector, Zambias maize output is expected to all by 30 per cent this year owing to the delayed supply o subsidised inputs toarmers and poor rainall. While the reduced harvest will still be enough to cover domestic demand, it will have a clearly negativeimpact on armers incomes and private consumption.

Another round o negotiations between the IMF and Egypt over a much needed $4.8 billion loan has ended without a resolution.Te IMF has called or cuts to subsidies, which make up a large percentage o the Egyptian Governments expenditure, but cuts haveproven politically dicult to implement. Qatar recently provided another $3 billion to Egypt, but it is uncertain i this was a loan or agrant. Rwandas sale o $400 billion in 10-year Eurobonds was over seven times oversubscribed, pushing the yield down to 6.875 percent. Te revenue will help to ll a scal gap that has resulted rom cuts in ocial development assistance.

East Asia: growth momentum weakened in early 2013

In most East Asian economies, GDP growth slowed early this year in the rst quarter o 2013 as both internal and external demandweakened. In China, economic activity expanded by 7.7 per cent year on year and by 1.6 per cent quarter on quarter, down rom 7.9per cent and 2 per cent, respectively, in the previous quarter. Te slowdown in China mainly refects lower growth in consumption

and investment spending. In Singapore and aiwan Province o China, economic activity contracted in the rst quarter o 2013compared to the previous three months. In both economies, exports were held back by the slowdown in China and ongoing weakdemand in most developed countries.

By contrast, economic growth picked up mildly in the Republic o Korea during the rst quarter on the back o a recovery in grossxed capital ormation and the ront-loading o government spending. Exports o goods and services grew aster than expected, butthe strong depreciation o the Japanese yen is likely to weigh on the Korean export perormance in the near term. However, privateconsumption declined or the rst time since late 2011, raising worries about the sustainability o the recovery. In an attempt to sup-

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port growth, the Government o the Republic o Korea announced additional scal stimulus measures in the orm o a supplementarybudget. About two thirds o the supplementary budget will be used to cover tax revenue shortalls; the rest will be additional expen-ditures, including support or SMEs and local governments.

South Asia: building collapse puts spotlight on Bangladeshs garment industry

In Bangladesh, more than 1,100 people were killed when a building that mainly housed garment actories collapsed in late April. Te

tragedy triggered renewed strikes and widespread protests over the working and saety conditions in the garment industry. At thesame time, ears have emerged that some Western retailers could stop manuacturing in Bangladesh. Te garment sector accountsor nearly 80 per cent o the countrys total export revenues and employs an estimated our million people, most o them women. Ithas seen rapid growth in recent years, as improved duty-ree access to the European Union since 2011, along with rising productioncosts in China, led to a shit in textile manuacturing capacities to Bangladesh. Te building collapse came less than six months atera re in a garment actory let 117 workers dead.

In several South Asian economies, consumer price infation slowed considerably in recent months. In April, year-on-year infationdropped to a nine-year low o 5.8 per cent in Pakistan and to 6.4 per cent in Sri Lanka, as upward pressures on ood prices declined.In India, wholesale price infation moderated to 6 per cent in March, but consumer price infation remained above 10 per cent. TeReserve Bank o India lowered its benchmark policy rate or the third time in 2013 by 25 basis points.

Western Asia: Israel still without a budget or 2013

In the absence o a political consensus, Israel continues to operate under the 2012 budget on a month-to-month basis. Spending

cuts that would mostly aect lower-income groups and modest tax increases are under consideration as a means to contain a budgetdecit projected to increase rom 4.2 per cent o GDP in 2012 to 4.7 per cent o GDP in 2013. Meanwhile, Qatars recently approvedbudget or the upcoming scal year plans an 18 per cent increase in total expenditures. By assuming an annual oil price o $65 perbarrel and keeping the largest revenue-earner, liqueed natural gas, o-budget, the scal surplus is expected to drop rom 8 per cento GDP last year to 1 per cent o GDP.

Saudi Arabia stepped up its policy or the Saudization o the labour orce by extending the quotas o national employees to SMEs.Migrants with an illegal status are believed to represent more than one third o the 7 million migrant workers who represent 90 percent o the labour orce. Migrant deportation already aroused ocial protest by India and Yemen and could generate disruptions incertain sectors. In urkey, capital infows, especially in corporate bond markets, continue to put upward pressure on the exchangerate. Te twelve-month trailing current-account decit and infationary pressures continued to decline.

Latin America and the Caribbean: manuacturing production weakens

Te manuacturing sector in the region perormed weakly early this year. In March, the manuacturing output in Chile ell by 3.0per cent year on year; Colombias output ell by 4.5 per cent in February. Ocial estimates or Argentina on manuacturing activityalso show an output reduction in March by 0.3 per cent year on year, seasonally adjusted. Other countries exhibited meagre growth.In Brazil and Peru, manuacturing production in January and February increased by 1.1 and 1.7 per cent, respectively, compared tothe same period in 2012. On a seasonally adjusted, year-on-year basis, manuacturing production in Mexico marginally increasedby 0.4 per cent in January and 1.2 per cent in February. Te current appreciation trends o domestic currencies in some countriesare adding new challenges to the manuacturing sector in the region by making exports less competitive.

For the rst time in nearly two years, the Central Bank o Brazil raised the Selic interest rate to 7.50 per cent rom the all-time lowo 7.25 percent, ollowing recent higher infation. Te consumer price index rose by 0.55 per cent in April. Tus, consumer price infa-tion reached 6.49 per cent in the last twelve months, close to the upper limit o the central banks target o 6.5 per cent. Te decisionis expected to be the starting point or a modest monetary tightening cycle.

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