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World Economy - Feb 14 [Gulf Oil & Gas (Egypt)]
[February 15, 2014]

World Economy - Feb 14 [Gulf Oil & Gas (Egypt)]

(Gulf Oil & Gas (Egypt) Via Acquire Media NewsEdge) Recent developments point to a slightly more accentuated trend of improving OECD economies while emerging economies continue to decelerate. The situation in emerging economies has become even more aggravated after the recent decline in their currencies. Consequently, while the 2014 GDP growth forecast for the OECD has been revised up from 1.9% to 2.0%, China's growth expectation has been lowered to 7.7% from 7.8%, in line with its 2013 GDP growth level. India has experienced some improvements recently and the 2014 GDP growth forecast remains at 4.7% for 2013 and 5.6% for 2014. However, Russia's 2014 forecast has been lowered from 2.2% to 1.9% and Brazil's growth expectations now stand at 2.7%, compared to 2.8% in the past month. This deceleration in the emerging economies will need to be closely monitored in the coming months. But major OECD economies are also facing serious challenges, ranging from slowing manufacturing activity, ongoing debt ceiling negotiations in the US, the fragility of France in the Euro-zone and a sales tax increase in Japan, all of which could act as a potential drag on growth.OECD AmericasUS The United States recovery continues with a better than expected dynamic. This has become visible not only in the 3Q13 GDP number but even more so in the strong continuation of this growth trend during the 4Q13. Also, the labour market continued improving in the second half. However, the recent deceleration of leading indicators and slowing job growth have highlighted the fact that challenges still remain. In addition, the issues of slowing momentum in the manufacturing sector, the ongoing negotiations over the debt ceiling and recent improvements in a sluggish job market will need close monitoring in the coming months. So far, amid sufficient signs of improvements, the Federal Reserve Board (Fed) has been confident enough to continue its tapering of the extraordinary $85 billion monetary stimulus. But this may not be permanent, as a continuation of the recent soft trend may lead the Fed to consider pausing its stimulus reduction efforts.

A strong growth number for the final quarter of last year – at the seasonally adjusted annualized rate of 3.2% q-o-q – confirmed a significant uptick of economic momentum in the 2H13. GDP grew by 4.1% q-o-q in the 3Q13. While the 3Q number has also confirmed a significant recovery from a sluggish 1H13, it has largely been driven by inventory build and, to a lesser extent, private household consumption, which constitute the main factor for US GDP growth. The 4Q13 number, however, showed a significant improvement in the composition of GDP supporting factors with consumption increasing by 3.3%. This compares to a 22-year average of 3.0% growth in consumption. Since private household consumption accounts for around 70% of GDP, this development is important.

This momentum is even more impressive when considering that in October, the US was in the midst of the debt ceiling debate and facing a government shut-down, both of which led to some weakening in business and consumer confidence. The recent positive trend has led the Fed to again recognize the uptrend and further continue tapering its quantitative easing (QE) from $75 billion to $65 billion per month.

While the labour market has continued improving, the dynamic is weakening slightly. Non-farm payroll addition was less than expected at only 115,000 in January, compared to a low number of only 75,000 in December. Last year's average to November stood at a solid 200,000 monthly job additions. The participation rate has remained at a relatively low 63%, but this was slightly better compared to December's 62.8%. Another positive sign from a macro perspective was the once again improving long-term unemployment figure, which dropped from 37.7% to a low of 35.8%. This is indeed the lowest level of long-term unemployment since September 2009.

The Purchasing Manager's Index (PMI) for the manufacturing sector, as provided by the Institute of Supply Management (ISM), has posted a rising trend in most of the past months. However, the January level fell significantly and more than expected to only 51.3 from 56.5 in December. This has been partially explained by the extraordinary cold weather, which the US was facing in January. But it should also be highlighted that most of the expectation components were pointing at a slowing dynamic in the nearfuture for the sector. Industrial production rose by a healthy 3.7% y-o-y in December, at around the same level as in October and November. The ISM for the services sector – which constitutes more than two-thirds of the economy – increased to 54.0 from 53.0 in December, also showing a positive trend.

The most recent developments in the 2H13 have led to an upward revision of 2014 growth expectations from 2.5% to 2.7%. There is still upside potential if the dynamic from the momentum of 2H13 is fully taken into consideration. But with all the challenges in the economy, this currently seems too early. US growth for 2013 has been revised according to the preliminary full-year growth number of the Bureau of Economic Analysis of 1.9%, which compares to last month's growth estimate for 2013 of 1.8%.Canada In Canada, improvements in the economic situation continue along with those taking place in its most important trading partner, the US. But a recent slow-down has also become apparent. Industrial production in November rose by 2.3% y-o-y, almost the same level as in October, when it rose by 2.8% y-o-y, which at that time was the highest growth level since June 2012. However, the manufacturing component of industrial production in November grew by a smaller rate, while manufacturing orders (new orders) declined by 2.3% y-o-y, confirming a mixed trend. GDP growth expectations remain unchanged for 2014 and 2013 at 2.3% and 1.7%, respectively.OECD Asia-PacificJapan The economy of Japan continues to expand as it improves its growth momentum not only domestically but also via a continued expansion in export levels. All in all, the economic support program initiated last year continues bearing fruit. This is one of the reasons that the 4Q13 GDP growth level is forecast to move from the 3Q13 seasonally adjusted annualized rate of only 1.1% q-o-q to a higher level of more than 3%. This will again be very high growth for an economy that had average GDP growth of around 1% in the past 20 years. So the stimulus policy – comprising of the three arrows of fiscal measures, monetary support and structural improvements – are continuing to improve the economic landscape for Japan. However, this stimulus policy comes at a price. There is some uncertainty about where such aggressive monetary policy will lead to.

This is unprecedented at these levels and while it has been successful so far, it may lead to unintended consequences. Japan's monetary policy has been enacted to push the consumer price development out of the negative zone in which it has been in the past years up to a more reasonable and healthier level of 2%, which the Bank of Japan (BoJ) has defined as their target for the end of the current year.

It now seems that this target might be achieved at an earlier stage. The most recent inflation number for December stood at 1.6% y-o-y, at around the same non-seasonally adjusted level as in November. This seems to be an impressive achievement, particularly since the unemployment rate in Japan recorded a new low of only 3.7%. Inflation without food and energy is still low at only 0.7% y-o-y. One obstacle to this policy, however, might be that household incomes have not risen at the same pace. So while a reasonable inflation level might be a positive development, it is so only as long consumers can also afford this relatively low level of consumer price inflation. Earnings in the 4Q13 rose only by 1.1% y-o-y, i.e. below the inflation level. In this environment it is relatively unclear how the BoJ will pursue its monetary policy since the already high inflation would call for a reduction of monetary stimulus, while at the same time growth would probably need further monetary support, when considering the near term sales tax increase and sluggish growth in household earnings.

In this respect, it will be important to see what the impact of the planned sales tax increase in April from 5% to 8% will be as this will also eating away real income from consumers. On the other side, this constitutes a very necessary step in the direction of lowering the record high debt pile of the country to a more reasonable level. The government has announced that it will try to counterbalance the immediate negative effect to the economy via further stimulus measures, but has also made clear that it is aware of the need to reduce public debt. This will reduce the future ability of the government to implement stimulus measures and, therefore, the need for the current policy to be successful is important. So far, no GDP growth is forecast for 2Q14 due to the negative effect of the sales tax increase. But if the fiscal counterbalancing turns out to be even more successful, it could see some expansion.

Industrial production increased by an impressive 5.9% y-o-y in December after 6.2% y-o-y in November. This again has been fuelled by rising exports which increased by 17.0% y-o-y, almost the same level as in November and October. In addition, the other important component has certainly been rising domestic demand. Retail sales in December rose by 2.6% y-o-y, after rising 4.1% y-o-y in November. Lead indicators point to a continuation of the current growth momentum. The latest numbers from the PMI, as provided by Markit, shows an increase for the manufacturing sector from 55.2 in December to an impressive 56.6 in January, while the services sector PMI has declined slightly from 52.1 in December to 51.2 in January.

With almost the same trend as in the past months, the GDP forecasts for 2013 and 2014 remain unchanged at 1.7% and 1.5%, respectively. For this year, the increase of the consumption tax is expected to have a large impact on the 2Q14 growth number, which is now expected to be flat, after a more significant rise in the current quarter ahead of the tax increase.South Korea Growth in South Korea has been strong again for most of 2013 and stood at a seasonally adjusted annualized rate of 4.0% q-o-q in the 4Q13, after 3.3% q-o-q growth in 3Q13, leading to a fiscal year expansion of 2.8% in 2013. This compares to last month's expectation of 2.4% growth for 2013. The positive trend in the economy is expected to continue, with the composite leading index of the National Statistical Office having reached a new record high of 117.7 in December. While the growth forecast for 2014 remains unchanged at 3.0%, the underlying upside potential may lead to a higher forecast in the coming months, if the current trend continues.OECD EuropeEuro-zone The Euro-zone continues its recovery from a very low level and a mixed growth pattern, as has been observed in the past months. While some of the latest indicators confirm expectations of an improving economy – albeit from a relatively low level – the most recent output data from other major economies in the Euro-zone remains sluggish.

Industrial output in both Germany and France declined on a monthly basis in December, the latest available number. In Germany it fell by 0.7% m-o-m and in France it declined by 0.3% m-o-m. Italy also posted a negative trend of 0.9% m-o-m and only Spain added positively to the Euro-zone's industrial output with 1.0% m-o-m. This has not become available in total for December but will likely point to a slow-down after a strong rise of 1.9% m-o-m in November. Moreover, the danger of inflation remains with a record low inflation number of only 0.7% in January, after already registering a low number of 0.8% in December. This is the fourth consecutive month of inflation below the 1.0% level. This low inflation number has also been acknowledged by the European Central Bank (ECB). But while many observers expected the ECB would act in response to that, it decided to wait until its March meeting, when more evidence will become available for future inflation and growth patterns. The ECB will then have its forecast to 2016 available. So while some parts of the Euro-zone's economy continue to recover, the dynamic of this rebound seems to be relatively modest. Leading indicators point to a continued but fragile pattern. Also, the still high unemployment rate of 12.0% in December is a hurdle that is providing a significant challenge to the economy.

The ECB's somewhat surprising move caused the euro to strengthen again as expectations had been that the ECB would continue easing its monetary supply more aggressively, given that the economic situation in the Euro-zone remains fragile and that inflation has moved to record low levels. Moreover, lending of financial intermediaries to private households remains low and has declined again in December at 2.9% y-o-y, while this is better than the November decline of 3.2% y-o-y, a bottom level so far.

Leading indicators confirm the unevenness of the Euro-zone's growth pattern. The latest PMI for manufacturing, as provided by Markit, stood at 54.0 in January, better than the 52.7 in December and the 51.6 in November. It reached 56.5 in Germany but stood at only 49.3 in France. In Italy it reached 53.1. So while the economy is on average gently improving, the main issues of the Euro-zone remain: patchy and uneven growth, record unemployment and an impaired monetary transition channel – now exaggerated by low inflation levels, particularly when considering the ECB's inflation target of below but close to 2%.

Taking into consideration the slightly improving general trend since the 3Q13, the 2013 estimate for GDP growth has been slightly revised upwards to -0.4%, compared to last month's level of -0.5%. The 2014 GDP growth forecast remains at 0.7%. It has to be seen to what extent the economy will manage to rebound in the coming months as many uncertainties prevail. But it will certainly need larger economies – mainly Germany and France – to improve with the other peripheral economies supporting growth.UK The United Kingdom's most recent economic performance has been stronger than in most of its fellow EU countries. After a relatively soft start of the year, growth in 2013 accelerated considerably and moved to a seasonally adjusted annualized rate of 3.1% q-o-q and to 2.8% q-o-q in 3Q13 and 4Q13, respectively, leading to 1.9% growth in 2013. The momentum was broad-based and after industrial production increased by 2.1% y-o-y in November, it rose again by 1.8% y-o-y in December. Also, the PMI for manufacturing stood at a significantly positive level of 57.3 in December and only slightly lower at 56.7 in January, all pointing at a continued expansion of the sector.

The important services PMI also almost remained at the elevated December level of 58.8, falling only very slightly to 58.3 in January. The current positive situation of the UK needs close monitoring as the risk is currently skewed to the upside. Consequently, the forecast for 2014 has been revised upwards to 2.2% from 1.8% in the past month.Emerging and Developing Economies Prudent monetary policy and a robust stock of reserves is helping Brazil to cope with uncertainties and volatility in international markets. Nevertheless, the slowing momentum of consumer confidence that began at the end of 2013 and which has extended to the first month of this year, along with a softened momentum in the services sector, do not suggest a quick improvement in retail sales in Brazil. The estimate for 2013 GDP growth remains intact this month at 2.5%, whereas this year's forecast has been pared back slightly to 2.7%.

The preliminary 2013 GDP growth rate highlights how sluggish the pace of recovery from the financial crisis is in the Russian economy. With some positive effects that may emerge from limited currency depreciation on exports (and imports) – by making domestically-produced products and services more competitive amid ongoing recovery in the Euro-zone – little else promises much of a rebound in Russian economic activity this year. Substantial capital outflows from the economy in the past two years are seen to remain a big drag on growth rates in the near future. This obviously points to the need to pare back the forecast for Russia's 2014 GDP growth. Indeed, it has been revised down from 2.2% to 1.9%, whereas the 2013 estimate is now at 1.3%, down from last month's 1.5%.

India's industrial production contracted for the second consecutive month, falling 3.2% y-o-y in November, as manufacturing activity slumped. Manufacturing activity as part of industrial production also contracted by 5.7% y-o-y during November-December and it seems to have had a downward effect on India's GDP in 4Q13. However, all negative effects seem the same as in the previous month despite the mentioned output deterioration. Indian manufacturers signalled a slight improvement in operating conditions during January 2014 but services activity shows no signs of rapid recovery. The GDP growth forecast remains at 4.7% for 2013 and 5.6% for 2014.

China's National Bureau of Statistics issued economic data for 2013 showing that the Chinese economy achieved growth of 7.7% y-o-y during the 4Q13, down marginally from 7.8% in the 3Q13. Slowing exports and investments led to a softer than expected industrial output. China's economy will continue to be influenced by various factors, including shadow banking, in coming months.Brazil In 2013, Brazil's current account deficit increased from $54 billion in the previous year to $81 billion. Most of the deterioration in the external deficit was caused by a widening trade deficit, which in turn was driven by a slowing oil exports, soaring oil-related imports, and worsening service and income accounts. This has brought the current account deficit in 2013 to 3.7% of GDP, up from 2.4% in 2012. For the first time since 2000, Brazil had to use foreign exchange reserves to cover some of the deficit – approximately $6 billion. The good news is that Brazil still has around $370 billion in foreign exchange reserves, an amount that exceeds the total stock of external debt.

As for the primary surplus share of GDP, the total public sector ended 2013 with a primary surplus of 1.9%, down from 2.4% in 2012, and below the 2.1% target specified in the budget law. The central government posted a 1.6% surplus, benefiting from a huge amount of one-off revenues at the end of last year. Meanwhile, the local government surplus was as low as 0.3%, down from 0.5% registered in 2012.

In December, Brazil's unemployment rate fell to 4.3%, the lowest rate on record since the survey started in early 2001. However, data showed that the number of unemployed people declined but the number of employed people declined as well. Employment was down by 106,000 people from a year earlier (or 0.6%). What brought the unemployment rate down was the decline of the labour force (down by 181,000 people or 0.8%). December's employment survey brought mixed news regarding personal income. Average personal income was up 3.2% in real terms from a year earlier but down 0.7% compared to November 2013.

Brazil's exports increased by only 0.4% y-o-y in January, slowing from 5.6% a month earlier but also sustaining its positive growth for the fifth month running. But consumer confidence in Brazil seems to be sliding for the second consecutive month, falling to 112.3 in January 2014 from 113.8 in December 2013. This also highlights a much lower reading for the index than the 121.1 of January 2013.

The manufacturing sector managed to keep its expansionary direction in January, though it was still too close to the neutral line and showed only a slight improvement over the last month of 2013. Brazil's manufacturing PMI posted 50.8 in January, up from 50.5 a month earlier. The survey showed a faster expansion of new orders. But while production increased, it was at a slower speed. The services sector showed a downward sign at the beginning of the year with the services PMI sliding into the contraction territory. The country's business activity index fell to 49.6 in January from 51.7 in December.

All in all, the Brazilian economy continues to create jobs. This is unsurprising since during the 2009 recession labour market indicators remained positive. Still, the outlook for growth in consumption is less positive as a big jump in new job creation is not forecast for 2014 and household credit might not expand rapidly this year. Moreover, the slowing momentum of consumer confidence which began at the end of 2013 and extended to the first month of this year, along with a softened momentum in the services sector, do not suggest a quick improvement in retail sales in Brazil. This, in turn, is going to put a significant limit on GDP growth in 2014. On the other hand, the robust stock of reserves is helping Brazil to cope with uncertainties and volatility in international markets, and to appease investors that otherwise would be tempted to take their capital out of the country. The estimate for 2013 GDP growth remains intact this month at 2.5%, whereas this year's forecast is being pared back slightly to 2.7%.Russia At the beginning of 2014, business conditions facing Russian manufacturers continued to worsen. The manufacturing PMI survey found that all key economic activity indicators point to a broad-based contraction. The PMI posted below the 50 point threshold for the sixth time in seven months in January. Notably, manufacturing output decreased for the first time since July 2013. The PMI declined from 48.8 to 48.0, the lowest reading since June 2009. The survey showed that manufacturers have shed staff and cut input purchases in January.

With regards to December 2013, industrial production showed a positive y-o-y movement, increasing by 0.8% over the same month of 2012. Still, this needs to be followed with more obvious acceleration to suggest any departure from the sluggish pattern seen since May 2013. Following the strong performance in retail sales in November 2013, the percentage change in retail sales in December y-o-y could not maintain that improvement and fell once again below a 4% rate of increase. This came as the unemployment rate rose above 5.5% for the first time in December since April 2013. On the last day of January, Russia's Federal Statistics Service announced its preliminary GDP estimate. The figure showed that GDP increased by only 1.3% y-o-y in 2013, an even slower pace than the latest official down revision of 1.4%. This also means that the 4Q13 was as sluggish as the preceding two quarters. Performance in industry was a major disappointment, with an increase in value added at only 0.6%, compared with 2.1% in 2012. The sharpest deceleration came in manufacturing, with growth in value added at only 0.8%, down from 2.7% a year earlier and 6.4% in 2011.

Consumer sentiment started weakening late last year in Russia as households had to spend a growing portion of their income to service debt. As the growth of household consumption in 2013 was significantly slower than in 2012, it is not surprising that growth of value added in the trade sector slowed to 1.1% from 3.8% in 2012.

The rouble fell last month near a five-year low against the US dollar. The rouble's depreciation could prove helpful to support economic growth in Russia as a weaker currency makes its exports more competitive. A recent survey showed that respondents were the most positive on exchange rate conditions in January.

The preliminary GDP growth rate in 2013 highlights how sluggish the pace of recovery from the financial crisis is in the Russian economy. The minister of economy expects a growth of 1% in the 1Q14, to be accelerated to no higher than 2% in the 2Q14. The ongoing recovery in Western Europe seen for 2014 should provide some further support for exports of goods and services from Russia. Little else promises much of a rebound in Russian economic activity this year. This obviously points to the need to pare back the forecast for Russian GDP growth in 2014. Indeed, it has been revised down from 2.2% to 1.9%, whereas the 2013 estimate is now at 1.3%, down from last month's 1.5%.India The impact of protracted tight monetary policy conditions in India since 2011 have taken a heavy toll on the manufacturing sector during 2012 and 2013. India's industrial production in November 2013 showed a 3.24% contraction year on year, reflecting continued recessionary conditions in the Indian industrial sector.

Industrial production contracted for the second consecutive month, falling 3.2% in November, as manufacturing activity slumped and manufacturing industrial production contracted by 5.7% y-o-y in November. The manufacturing output index in November 2013 was at its lowest level since October 2011, highlighting the protracted duration of the current economic downturn. A total of 10 of the 22 sub-segments of the manufacturing sector showed negative growth rates for November. The weakest sector of manufacturing production was for food products, which showed a 8.7% contraction in November y-o-y, with the consumer durable goods sub-segment down even more sharply, by 21.5% y-o-y.

It seems food prices have continued to correct sharply in January and are expected to do so until the general elections. Continued weakening of the growth momentum in 1Q14 – because of the sharp fiscal squeeze needed for the government to meet its budgeted fiscal deficit – are expected to put some downward pressure on core inflation.

The protracted weakness of the Indian manufacturing sector in November is also having a significant impact on the quality of Indian commercial bank loan portfolios in the 4Q13. This deterioration in asset quality continues to be a major concern for Indian commercial banks. Moreover, if current weak economic conditions persist, the credit quality of Indian commercial banks would likely deteriorate further. Some key sectors of manufacturing – particularly infrastructure, iron and steel, aviation and textiles – are of great concern, contributing significantly to the problem assets of the banking sector.

The Indian export sector is also showing a slight upturn in momentum in December, helped by the significant depreciation of the Indian rupee. The global growth environment will also be supportive for Indian exports. India merchandise exports increased to 3.89% y-o-y in December from 5.84% in November. Also, it should be noted that the current account improved sharply during the July-September period and following the US Fed's September announcement to postpone the tapering of its quantitative easing programme, the rupee has largely stabilized. It seems the volatility of the rupee exchange rate decreased in December 2013 and January 2014.

In recent days, a number of emerging markets have raised interest rates, largely in response to currency and balance of payments pressures. The Reserve Bank of India (RBI) hiked policy rates by 25 basis points (bp) at a repo rate of 8% and deftly moved closer to a flexible inflation-targeting approach, committing to a "glide path" that would bring the headline Consumer Price Index (CPI) down to below 8% in a year's time, as per the recommendations of the Urjit Patel Committee Report.* Markets were surprised by the rate hike because the RBI had chosen to keep them on hold in December. In addition, given the fact that headline inflation had moderated by 130 bp since then, and that food prices were continuing to correct, growth was continuing to disappoint and uncertainty about when the Committee Report would be adopted, the majority of market participants had expected the RBI to stay on hold.

Indian inflationary pressures are still stubbornly high and domestic monetary policy settings remain tight, which is choking off domestic consumption and investment, and which has kept the industrial sector in recession since 2013. Given the long lags in monetary policy transmission effects to the real economy, even a gradual moderate easing of monetary policy during the first half of 2014 would be unlikely to deliver any rapid economic recovery over the course of 2014. India's growth-inflation dynamics remain challenging, but there has been a significant macroeconomic adjustment in the ensuing months, resulting in the rupee outperforming most of its peers in the current bout of emerging market stress. The adjustment has been most impressive on the external front, with the current account narrowing to less than half its level from last spring.

Consequently, the broader pace of Indian economic recovery is expected to be sluggish at best during 2014. Until inflationary pressures abate sufficiently to allow significant monetary policy easing, the Indian economy is not expected to stage a strong recovery.

Despite a deterioration of manufacturing output in November and December 2013, the Indian manufacturers signalled a slight improvement in operating conditions during January 2014. The headline HSBC India PMI, a seasonally adjusted index designed to measure the performance of the manufacturing economy, posted 51.4, up from 50.7 in December. The latest reading was the highest since March 2013 but pointed to a marginal pace of expansion that was well below the series' average of 55.1. The seasonally adjusted HSBC India Composite Output Index indicated an improvement in private sector activity from 48.1 in December to 49.6 in January, but remained below the expansion line of 50 for the seventh consecutive month. It seems service sector activity remains weak and broad-based, although the Post & Telecommunications sector led the softening in January.

Sector data indicated that consumer goods continued to outperform the remaining two monitored categories, while operating conditions deteriorated at capital goods producers. Growth rates for output and new orders in the consumer goods sub-category surpassed those seen at intermediate goods companies. Employment rose for the fourth month running in January, with all three broad areas of the manufacturing economy posting job creation. Despite being a slight rise, the overall rate of expansion was broadly in line with the long-run series average. However, given that imports may recover once administrative restrictions are removed and considering additional capital outflows are still possible, the exchange rate will remain volatile over the near term.

In conclusion, forecasts for the Indian economy have been lowered to reflect expectations of weaker growth, higher inflation, and ongoing external and fiscal strains, and there are risks that the country's sovereign rating will deteriorate further. This would have an adverse effect on public finances and eventually on growth. Uncertainty about the outcome of this year's general elections is also likely to limit progress, especially on much needed economic reform, while rising risks in the banking sector heighten central bank worries about the financial stability of the economy.

The expectation is that all risks this month will be similar to the previous month. For this reason, the expectation for 2013 and 2014 GDP growth rates remain unchanged: 4.7% and 5.6%, respectively.China China's National Bureau of Statistics issued economic data for 2013, showing that the Chinese economy achieved growth of 7.7% y-o-y during the 4Q13, down marginally from 7.8% in the 3Q. Slowing exports and investments led to softer than expected industrial output, which dipped back into the less than 10% range after an extended spell in that territory during the 1H13. A point of resilience has been steady retail sales, registering 13.6% growth, and slightly improving real estate investment, which accelerated to 19.8% y-o-y growth.

In the 4Q13, GDP growth for the primary industry (agriculture, etc.) was 4.0% y-o-y. It was up 7.8% for the second-tier sectors, and up to 8.3% for the third-tier sectors.

As emphasized in previous months, it seems the Chinese economy is still being impacted by the downward risks of shadow banking. The Shanghai Interbank Offered Rate (Shibor) rose sharply again in the end of January 2014 following the near default of one of China's shadow banking products. The episode shed light both on how risky these products can be (with, in this case, all the assets linked to one coal mine) and on the lack of a clear debt-resolution mechanism. Moreover, the regulators missed an opportunity to address moral hazard in the shadow banking sector and show that these products are not ultimately backed by the government through their links with state banks.

As a result of the nervousness in China's banking sector and pressures on liquidity, interbank interest rates rose sharply again at end of January with the overnight rate closing 100 bp higher at 4.8% over the course of two days on January 28, before falling back slightly to 4.4% two days later. Moreover, reflecting wider pressures, the threemonth interbank rate rose from 4.7% in early December to 5.6% currently, close to the levels seen in June's Shibor crisis, while the five-year government bond yield remained elevated at 4.5%, up from 3.2% in early June.

According to the result of China's local government debt audit, government debt rose to around 45% of GDP, which is still a very manageable level for a fast-growing economy. But with a 70% increase in the level of local government debt in three years, the rate of expansion is not sustainable. China's core challenge is to manage a slowdown in credit growth, bringing the debt-to-GDP ratio back to more sustainable levels, while allowing consumption growth to take up the slack.

According to China's National Bureau of Statistics, industrial profits (including all industrial companies with annual sales from principal business exceeding 20 million yuan) increased 12.2% y-o-y by the end of December (down 1.0% from the January-November figure) and compared to 5.3% y-o-y for 2012. For the monthly figures, industrial profits slowed to 6.0% y-o-y in December, compared to 9.7% y-o-y in November and a recent peak of 24.2% y-o-y in August 2013. Meanwhile, total industrial sales revenue (from principal businesses) increased by 11.2% y-o-y by December (the same as in November), compared to 11.0% y-o-y for 2012.

It seems that over the past year, the Ministry of Housing and Urban-Rural Development, which formulates policies and provides subsidies supporting urbanisation, have indicated a probable shift towards a smaller-scale urbanisation pattern, focusing instead on smaller cities and towns rather than further growth in existing mega-cities.

In the fourth quarter of 2013, total fixed assets investments (including rural and urban areas) reached 117 trillion yuan ($19.3 trillion), with a growth rate of 20% from the same period in 2012.

Gross fixed capital formation remains the top driver of China's growth, accounting for 4.19 pp of growth throughout all of 2013, representing a slight acceleration relative to 2012 and reversing a trend over the past two years wherein consumption led investment. Meanwhile, final consumption expenditure climbed to 3.85 pp from a low in 2Q13, although it remains down relative to its 2012 reading. Together, final consumption and capital formation figures highlight the fact that drawing direct conclusions from fixed asset investment and retail sales data can be tricky (both showed contrary evidence if assessed only in nominal terms). Lastly, net exports of goods and services showed a further decline, contributing -0.34 pp to 2013 growth, as exports oscillated month to month while imports grew steadily. In the coming year, net exports still may play a minor role in some quarters, particularly as major foreign demand centres stabilise further – although maintaining a neutral impact on the whole would be seen as a positive.

More importantly, the capital formation and consumption shifts highlight the response of economic policy-makers faced with the dual problem of encouraging structural adjustment while maintaining a steady growth trajectory. Since 2008 growth has been primarily investment-led during 2009, 2010 and the latter half of 2013; the remaining quarters have seen consumption-led growth. This highlights the fact that when growth is faltering, a strong policy response is likely, with the easiest lever being investment promotion through various channels. The fact that the economy once again returned to this state during the 2H13 merely highlights the increasing cyclicality of the Chinese economy, and that the adjustment will be a long and gradual one.

Economic data for October to December paint a stable picture of economic conditions in China. On the whole, the Chinese economy is performing well through its adjustment phase, which is likely to continue in fits and starts as leaders balance adjustment with total growth. The primary risk to growth in 2014 is a prolonged real estate slowdown, although urbanisation policies expected during the first half may help to reduce that slowdown to merely local pockets of contraction, rather than becoming a national trend. In conclusion, it seems that the banking crisis could lead to a sharp slowing of growth. But on the other hand, low inflationary pressure, export growth and the government deficit will support the Chinese economy in 2013.OPEC Member Countries Saudi Arabia's net foreign assets, held on the government's behalf by the Saudi Arabian Monetary Agency (SAMA), rose by $4.8 billion in November 2013 to a record high of $713.5 billion. Net foreign assets rose by 0.7% from the previous month and were 12.6% higher compared with November 2012. The CPI eased in Saudi Arabia to a 3.0% annual rate in December 2013 from 3.1% in November 2013, according to the Central Department of Statistics and Information (CDSI). Consumer prices were up 0.2% on the previous month. SABB HSBC PMI stood at 59.7 in January, up from 58.7 in December and rising for the third month in a row. The survey indicated a strong rise in new orders, output and employment.

Iran's Tax Affairs Organization showed that direct tax income rose 30% over the ten months to January 2014 over the previous period. Tax income amounted to around 12.7 billion during the past Iranian calendar year and it is forecasted to register nearly $18 billion in the current calendar year. Inflation eased by 0.5% in the 12-month period to December 2013, according to the Statistical Center of Iran. The government plans to decrease the inflation rate by 6 pp to 7% by the end of the current calendar year and to below 25% by the end of the next Iranian calendar year. Meanwhile, the economy ministry showed that Iran attracted $4.85 billion in foreign investment in the last Iranian year, following $2.60 billion and $4.60 billion in 2011 and 2012, respectively. This improvement came in part as a result of the policies aimed at increasing the share of industrial exports in non-oil exports to 45%. The Ministry of Industry, Mines and Trade pledged to attract $8 billion in foreign direct investment annually.

In Iraq, the Central Statistical Organization (CSO) showed that the headline inflation indicator for December 2013 increased at a rate of 0.4% as compared with the previous month and at a rate of 3.1% as compared with December 2012. Meanwhile, core inflation increased at a rate of 0.4% as compared with the previous month and at a rate of 1.6% as compared with December 2012.

In Venezuela, the Banco Central De Venezuela announced that consumer spending has increased to 11,605 million bolivar fuertes (VEF) in the 3Q13 from 11,160 million VEF in the 2Q13.

The CPI rose in the United Arab Emirates slightly to a 1.4% annual rate in November, after holding at 1.3% during the previous five straight months. Food inflation experienced unseasonable price increases in November. But even given the unfavourable base effects, overall price pressures in the UAE remain in check. Of note, food prices in the Emirate of Dubai leapt 2.3% on a monthly basis and 4.3% y-o-y in November. Housing price inflation was steady at 1.2% y-o-y in November, as prices were flat on a monthly basis. As a result, housing relinquished its position as the main inflation driver in the UAE with food retaking the lead, although likely only briefly as the recovery in the housing market gains further traction. According to the HSBC PMI, operating conditions continued their robust improvement in January, though at a slightly slower speed. The headline PMI fell slightly to 57.1 in January from December's 57.4.

According to Ecuador's central bank, the country's trade deficit between January and October 2013 was $1.1 billion. The government has announced that further controls are to be applied on imports into the country as it is aiming to reduce imports by $6 billion by 2017.

Nigeria National Bureau of Statistics is going to replace the present GDP price scheme for the first time in 23 years with the intention of reflecting structural changes in the economy. The re-basing exercise will change the base year to 2010, instead of 1990. The new GDP figures will give greater weight to communications, entertainment and mining. Meanwhile, the Central Bank of Nigeria held the benchmark interest rate at 12% in December, while ratcheting up the reserve requirement on government deposits at commercial banks to 75%.Other Asia In Taiwan, preliminary data showed the economy grew by 2.9% y-o-y in the 4Q13, significantly higher than the 1.7% y-o-y expansion in the previous quarter. Hence, the economy of Taiwan grew in 2013 by 2.2% over the previous year which had grown by 1.5%. In seasonally adjusted terms, the economy climbed 10.1% q-o-q annualised rate, strengthening sharply from a 1.1% gain in the previous quarter. The q-o-q rate represented the strongest expansion since the 2Q11. Exports of goods and services regained some strength in the 4Q, expanding 4% from 2012, accelerating from a 1.7% increase in the previous quarter. This improvement was a result of an export bounce of 1.4% in 2013, following the 2.3% deceleration in exports in 2012.

Last year's recovery in the economy of the US, alongside the gradual improvement in the Euro-zone economies, have created a positive momentum for Taiwan's exports that is anticipated to extend into 2014. Furthermore, demand from China was holding up and helped sustain export momentum. In addition, import growth also strengthened on the back of strong demand for capital and consumer goods. Imports advanced 6.1%, after gaining just 0.69% in the previous quarter. Stronger import growth resulted in a shrink in net exports, subtracting 0.25 pp from GDP growth. Concurrently, private consumption picked up at a strong pace, rising 3.3%, accelerating from a 1.5% gain in the previous quarter. The acceleration in consumer spending was underpinned by positive wealth effect from rising asset prices, which, coupled with heavy promotion and higher confidence, helped boost auto and retail sales. Taiwan's manufacturing PMI of January showed the quickest expansion of production since April 2011. The index posted at 55.5, up from 55.2 in December. The survey revealed an input price increase to 32-month high along with orders acceleration at the fastest pace in three years.

In Indonesia, the manufacturing sector continued to grow in January. The manufacturing PMI registered 51.0, up from 50.9 in December. The survey indicated a strong acceleration in new business along with slight contraction in output levels. Last month, the government of Vietnam announced plans to partially privatise several major state-owned enterprises (SOEs) in 2014, including Vietnam Airlines, Vietnam Motor Industry Corporation, and Vietnam National Textile and Garment Group. This signals the willingness of quickening macroeconomic reform efforts and is aimed at increasing the competitiveness of companies across all sectors with a particular focus on infrastructure, transportation, and the garment and apparel industry.

In Hong Kong, merchandise exports came in flat in December 2013 as demand from Asia stalled, while sales to the US and Europe fell. Official data shows that total exports were virtually unchanged from a year earlier at around $40 billion, following a 5.8% increase recorded in November. Shipments to Asia as a whole rose by a mere 0.4%, after increasing 4.3% in November. Exports to China were muted in December, up just 0.5% following a 3.7% gain in November. However, sales to several Asian economies recorded strong gains, including India (up 38.4%), Vietnam (up 22.6%) and South Korea (up 13.6%). These helped counterbalance a sharp 31.2% decline in shipments to Taiwan and an 18.9% drop in exports to Japan. In addition, exports to the US weakened again, decreasing 7% in December, reversing a 2% gain in November.

Shipments to Europe also faltered, led by an 11.1% drop in exports to Germany. Meanwhile, imports rose 1.8% in December, slowing from a 5.2% gain in November. For 2013 as a whole, exports rose 3.6%, while imports gained 3.8%.

In the Philippines, growth in the 4Q13 held up better than expected amid natural disasters, allowing the annual expansion to hit a three-year high of 7.2%. However higher imports to facilitate reconstruction are expected to put pressure on the 2014 growth rate. The performance of fixed investment during the 4Q was encouraging.

There was a slowdown to 7.0% y-o-y growth in the 4Q13 compared with 11.9% y-o-y in the 3Q, but this would have been expected even without any exogenous shocks.

Historically, fixed investment had been the weak link in the Philippine economy, with the sector's share in GDP languishing at very low levels relative to other countries at similar stages of development. Most recently, there has been a decided uptick in investment spending. However, this has been brought about by a combination of higher public outlays on infrastructure and a much improved political environment that has boosted investor sentiment and encouraged more robust private sector investment.

During 2010-13, real fixed investment growth has averaged 9.8% annually, far above the 2000-09 average of 3.7%. Investor perceptions about the country's business environment continue to improve. In fact, the country managed an impressive 25 point jump in global rankings in the 2014 World Bank's Doing Business Survey thanks to considerable progress in areas such as getting credit and resolving insolvencies.

However, sustaining the recent strong growth in investment is becoming somewhat more difficult. Thanks to its favourable external accounts position, the Philippines has not been much affected by the latest bout of global financial market volatility and aversion to emerging markets. However, the country is not entirely immune to such adverse developments.Africa According to the Kenya National Bureau of Statistics, the CPI in Kenya was unchanged at 7.2% y-o-y in January. On a m-o-m basis, the CPI increased by 1.1%, compared with 0.3% and 0.5% in November and December 2013, respectively. The main driver of the CPI during the month was a 2% increase in transport prices, which have an 8.7% weighting in the index, due to a higher prices of petrol and diesel and increases in public transport fares. This pushed the y-o-y rate in the category up to 6.8% in January, from 5.4% in December. Food and non-alcoholic beverages, with a 36.0% weighting in the index, increased by 1.0% m-o-m with the y-o-y rate in the category easing further from 10.4% to 10.1%.

In Uganda, the CPI increased to 6.9% from 6.7% y-o-y in December 2013, according to the Uganda Bureau of Statistics. On a m-o-m basis, the CPI declined by 0.1% in January, after having risen by the same percentage in December. The main driver was a 0.7% m-o-m drop in food prices in January, which have a 27.2% weighting in the CPI. In South Africa, the central bank raised the policy rate by 50 bp to 5.5% per annum late last month aiming at lending support to the weakening rand. The central bank's inflation forecast deteriorated significantly since the last meeting. The forecast average inflation rate for 2014 is 6.3% and 6.0% in 2015. Inflation is expected to breach the upper end of the target range in the 2Q14. However, the currency weakening is expected to remain influenced by the cutback in quantitative easing by the US Fed and continuing labour issues South Africa over the short-term. South Africa's January PMI indicated a fractional improvement in the economy's operating conditions, with the index remaining just above the neutral 50 point level by falling from 50.5 in December to 50.3 in January.

Egypt's foreign exchange reserves decreased by $678 million in December to $13.2 billion, following two sizeable non-recurring outflows, according to the Central Bank of Egypt (CBE). December marked the fourth consecutive monthly decline of reserves. However, despite the 4.9% m-o-m drop, the foreign exchange reserves ended the year up 27.0% compared with December 2012. The financial support from the Gulf countries – amounting to nearly $14 billion in grants, interest-free and soft loans, and fuel shipments, of which $8 billion had been disbursed by early December – have helped boost the CBE's foreign currency reserves. Overall, Egypt's net international reserves (which include gold reserves and special drawing rights) declined 4.1% m-o-m in December. However, on an annual basis, they concluded 2013 up 13.4%, topping $17.0 billion. The CBE's international reserves slumped to a 2013 low of $14.4 billion in April. The country's PMI demonstrated that the economy's private sector is back into contraction in the first month of 2014. The index slipped from December's 52.0 to 48.7 in January, highlighting the first retreat in operating conditions in three months. However, the survey showed that new export business increased for the third consecutive month in January.Latin America In Mexico, the economy's January manufacturing PMI reached its highest in a year with output volumes and new order intakes both rising at solid rates. The index stood at 54.0 in January, up from 52.6 a month earlier. The survey also indicated that new export orders expanded at their quickest pace since October 2012. Last month, the Central Bank of Mexico maintained its main policy rate at 3.50%. As of mid-January, inflation had exceeded the upper boundary of the targeted band, driven by the implementation of a fiscal reform that, among other things, includes a new excise taxes on certain goods and removes tax exemptions for border cities. Annual inflation stood at 4.6% as of 15 January.

In Argentina, the Argentine authorities lifted support to the peso on January 23, 2014, triggering a sharp devaluation of its official rate by 20%. This was followed by relaxation of controls on dollar purchases by Argentine nationals. Access to dollars for personal savings, which had been restricted since October 2011, was blocked totally in July 2012. However, under the new measures, from January 27, Argentine nationals with a minimum monthly income of 7,200 Argentine pesos (ARS) – $900 – are allowed to buy up to $2,000 per month for personal savings. Furthermore, a tax imposed on dollar purchases since March 2013 was cut back substantially, from 35% to 20%, although this reduction did not apply to credit card operations abroad. Also, the central bank raised interest rates by 600 bp to 25.9% on January 28. Inflation is likely to be higher in 2014 than last year given the cost impacts of the recent peso depreciation, and the unwillingness of the government to rein in public spending and the printing of money. Given this expectation, economic actors are expected to seek renewed protection by increasing their dollar holdings. Similarly, labour unions will seek wage settlements that match expected inflation, as they have successfully done so far, increasing the upward pressure on prices.

Bolivia's GDP is estimated to have reached 6.5% during 2013, according to the latest estimates from that country's central bank. The number reflected a year of buoyant economic conditions fuelled by strong domestic demand amid still high commodity export prices. This rate is one of the highest Bolivia has achieved in the last 30 years and situates the country as the second-best performer in the region after Paraguay. Bolivia's private consumption was strong, mainly fuelled by an increase in credit. The financial sector portfolio grew 18.6% and deposits in the financial sector grew 17.5% y-o-y in December.Transition region The Romanian central bank reduced last month its benchmark interest rate to a record low of 3.75%. This came as the government changed its four-year-old mortgage guarantee program that provide state-guaranteed loans amounting to 4.2 billion euros. The program guarantees half of the value of mortgages of as much as 75,000 euros with a 5% down payment. The program has been changed to only cover credit in Romanian currency so as to avoid any possible turbulence in the case of currency depreciation.

According to the "flash" estimate, Poland's GDP rose by a preliminary 1.6% in 2013, down from 1.9% the previous year. The new figures indicate that 4Q growth reached approximately 2.8% y-o-y, the strongest rate since early 2012. So far, Poland's Central Statistical Office has published only a partial breakdown of 2013 GDP growth. It is likely that net exports were the primary reason for the better-than-expected 4Q results. In 2013 as a whole, domestic demand declined slightly, indicating that net exports were the key driver of growth. Personal consumption did rise 0.8% in 2013 and government consumption appears to have increased considerably faster, given that final consumption was up 1.1%. With regard to manufacturing, the sector registered a strong start in 2014, with the PMI index reaching 55.4 in January from December's 53.2. The employment in manufacturing rose at a record pace, while new business showed a three-year high growth rate.

The Czech manufacturing economy showed a positive start to 2014, with the manufacturing PMI rising to its strongest reading since May 2011. The index posted 55.9 in January, up from 52.4 in the previous month. The survey demonstrated the strongest rise in output since April 2011 together with a 43-month record high in new export orders.

In Croatia, industrial production contracted in December as total output fell by 2.8% m-o-m in seasonally adjusted data. This followed a 0.8% decline in November 2013 and a 3.4% contraction in October. In December, energy production dropped sharply by 6.8% from a month earlier, followed by manufacturing, which was down by 2.8% m-o-m. The downturn in December drove industrial production downward by 2.8% from the previous year. For 2013 as a whole, industrial output fell by 2% compared with 2012. Double-digit growth of 10.9% in energy output was offset by the sustained weakness of manufacturing output, which accounts for nearly 80% of total production and was down by 3.7%, while mining and quarrying was down by 2.3%.

According to a "flash estimate" published by the Serbian Statistical Office (SSO), Serbia's economic growth weakened modestly in the 4Q. Real GDP is estimated to have growth by 2.6% y-o-y in the 4Q13, down from 3.7% y-o-y in the 3Q13. As a result, real GDP grew by an estimated 2.5% y-o-y. The contribution from domestic demand to Serbia's economic revival in 2013 has been negative, with retail trade turnover falling by 5.1% y-o-y at constant prices. In 2013, exports amounted to 11 billion euros – an increase of 25.8% compared with 2012. At the same time, imports rose by just 5.1% y-o-y to 15.5 billion euros. As a result, the customs-based trade deficit in 2013 amounted to 4.5 billion euros, a narrowing of more than one-quarter compared with 2012. The export-import ratio also underwent a vast improvement, rising to 71.1% from 59.3% in 2012. In 2013, the EU remained Serbia's most important trade partner, accounting for more than 60% of total foreign trade, led by Italy and Germany. Exports to the bloc increased by 33% y-o-y, while imports jumped by 10% y-o-y. The strong export performance in 2013 underpinned the positive industrial output data. Output performance in 2013 increased by 5.5% y-o-y but grew by a more modest 0.5% y-o-y in December 2013.

Data published by the Albanian National Institute of Statistics showed that Albania's trade gap in December widened by 13.5% from previous year. This is the first time in 2013 that the trade gap has widened in an annual comparison. In December 2013, exports grew by 19.5% y-o-y, although import growth was weaker at 15.8% y-o-y. As a result, the narrowing trend seen for the first 11 months of 2013 came to an abrupt end in December. Nonetheless, for 2013 as a whole, the foreign trade gap narrowed by more than 15% y-o-y with exports growing by 15.6% y-o-y while imports fell by 3% y-o-y. EU countries continued to account for more than two-thirds of Albania's trade turnover in 2013, increasing by 4% from 2012.Oil prices, US dollar and inflation While the US dollar has been relatively resilient compared to its major currency counterparts, the main event on currency markets has been the deceleration of emerging market currencies in the second half of January. While this has been triggered by developments in the Argentine peso, in combination with the decision by the Fed to continue tapering a week later, some emerging market currencies were also affected by a contagious sell-off. With the exception of the peso, and after some strong key policy interest rate changes, these other currencies have recovered almost to the levels seen before the depreciation.

Compared to the major currencies, the US dollar remained almost unchanged on a monthly average. Compared to the euro, the dollar gained 0.6% in January and stood at a monthly average of $1.3612/€. Versus the Japanese yen, it rose by 0.5% to ¥103.935/$. Only when compared to the pound sterling did it fall again for the second consecutive month by 0.6% after minus 1.8% in December, while compared to the Swiss franc it rose by 1.0%. With the ongoing recovery in the US and the tapering of the Fed, as well as expectations of continued monetary stimulus from the ECB (which is to be reviewed in March), continued efforts to weaken the yen by the BoJ and the weakness of emerging markets, the US dollar should be expected to appreciate in the coming months.

In nominal terms, the price of the OPEC Reference Basket fell by a monthly average of $2.96/b, or 2.7%, from $107.67/b in December to $104.71/b in January. In real terms, after accounting for inflation and currency fluctuations, the Basket declined by 2.4%, or $1.58/b, to $63.45/b from $65.03/b (base June 2001=100). Over the same period, the US dollar rose by 0.3% against the import-weighted modified Geneva I + US dollar basket† while inflation remained flat.

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