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World Economy - Dec 12

Source: OPEC_RP121205 12/12/2012, Location: Europe

Industrialised countries
The US economy remains relatively resilient and the third-quarter GDP performance was at an impressive 2.7% growth rate, compared with a rather low level in the second quarter of 1.3%. While most indicators recently allowed the conclusion of a slight rebound of the economy, the latest slowing in some of the lead indicators highlights that the economy remains fragile. This could also reflect the uncertainty ahead about a solution to the ‘fiscal cliff’ issue, which is holding back investment, as can also be seen in the diverging trend of capital expenditure in the USA vis-à-vis the positive trends in the labour market.

The GDP figures for the third quarter of 2012 (3Q12) offer some surprises, which have been confirmed by the latest GDP-assessment. After more than two years of negative quarterly Government spending, this suddenly jumped by 3.5% in 3Q12. The majority of this increase came from the federal budget, which increased by 9.5% on a quarterly base, by pushing up defence spending by 12.9% quarter-on-quarter (q-o-q) and non-defence spending by 3.0%. This led to a contribution of Government spending of almost 0.7% percentage points (pp) to the 2.7% quarterly growth, with the majority coming from the defence side, which contributed 0.64 pp. Since the Government had held back on spending in recent years and suddenly — in the run-up to the recent elections — seemed to spend more on the easy-to-fund defence item, the coming GDP figures would again seem to require some room on the downside because it is not expected that this Government support will be repeated any time soon. This also makes it less likely that — without any other stimulating effect — the GDP figures in the near term will increase significantly from the current level of around 2% on average. Adding to an expected slowdown in 4Q12 are the potentially negative effects of Hurricane Sandy, which hit the east coast at the end of October. The major uncertainty, however, remains with how the issue of the fiscal cliff — a mix of spending cuts and expiring tax cuts — will be addressed, as it seems that businesses remain reluctant to invest heavily in such an environment of political uncertainty. This current uncertainty, combined with the fiscal issues, may lead to muted growth next year, which is expected to be below this year’s level. If, on the other hand, agreement on the fiscal cliff issues is found relatively soon and the newly elected administration is able to provide some confidence to business about its future handing of the economy, this could unleash some of the spending that is currently being held back.

The relatively high level of sovereign debt will certainly remain a topic of discussion for some time to come, considering that the debt ratios are among the worst in the developed economies, with a US budget deficit for 2012 of 8% and a gross debt-to-GDP ratio of 107%, according to the forecast of the International Monetary Fund (IMF). It is clear that the US Administration will need to bring down the debt pile, which in any case will continue to have an impact on GDP growth levels in the coming years. If, therefore, considering a 30-year average growth rate of the US economy of around 2.5% and growth potential of up to 4% per annum, the current level of around 2.0% growth, as in 3Q12, seems to be a reasonable figure that — given the fiscal drag — will not have much upside currently, even when considering the improvements in the labour and housing markets, as the two major branches of private household spending accounting for around two-thirds of the economy.

In the meantime, the labour market — despite being a lagging indicator — has offered some bright spots. Unemployment fell to 7.7% in November, compared with last month’s figure of 7.9%. This is the lowest figure since January 2009, shortly after Lehman went bankrupt. Job additions in the non-farm payroll area continued at 146,000. The private sector added 147,000 in November, slightly lower than the October level of 189,000. The share of long-term unemployed also fell, to reach 40.1% in November, after it had risen to 40.6% in October. On the more negative side, and potentially a reason why the improving labour market seems to have had only a small impact on lifting GDP, is that the participation rate is still relatively low at 63.6%, less than the 63.8% of October. Furthermore, earnings increases have come down consecutively over the past 12 months. With slight improvements in the labour market, consumer confidence has held up well. The consumer confidence index of the Conference Board rose again in November to 73.7, after an already considerable rise in October to 73.1, from September’s 68.4. This is not only the highest level so far this year, but also the highest since March 2008. However, some momentum is fading, as monthly retail sales figures fell by a small margin of 0.3% in October.

Industrial production continues to expand on a yearly base, but at a lower rate. It grew by 2.1% in October, after 3.4% in September. Manufacturing orders rose strongly again and pointed to higher production figures when they increased by 3.0% y-o-y in October, after a rise of 1.8% y-o-y in September. However, some slowing of the momentum has been noted in the latest figures from the Institute of Supply Management (ISM), which provides the main purchasing managers’ index (PMI) for the US economy. The ISM figure for the manufacturing sector in November stood at 49.5, just below the growth-indicating level of 50 and significantly below the 51.7 of October. In contrast, the ISM for the services sector increased to 54.7 in November from 54.2 in October, pushing the composite index slightly higher in November to 54.1 from October’s at 53.9.

The very important housing sector continues improving. Pending home sales increased by 5.2% in October, after rising by a slight 0.3% in September, according to the National Association of Realtors. Pending home sales are considered a leading indicator of progress in real estate because they track contract signings. Positively, the yearly change to the house-pricing index of the Federal Housing Finance Agency has continued its rising trend with a monthly price increase of 4.4% in September, after 4.8% in August and 3.9% in July.

So, considering that the most recent improvements have been slight, mainly with fiscal and monetary support, and that many, primarily political, uncertainties that could have a significant impact prevail, the growth forecast remains unchanged at 2.2% for 2012 and at 2.0% for 2013. If, however, some more evidence becomes available of a positive solution to the fiscal issues, this could have some support and raise the growth forecast accordingly to a slightly higher level.

The Japanese economy continues to decelerate significantly from the impressive recovery-induced growth level of the first quarter of this year (1Q12) at 5.3% seasonally adjusted annualized growth. The latest revised figures suggest that that should be the highest quarterly growth rate for some time. This is after 2Q12 growth fell to 0.3% and 3Q12 dropped well below zero at –3.5%. These developments were triggered by further declining exports and soft domestic demand. Moreover, lead indicators like orders do not point to a recovery anytime soon. This makes it almost certain that the economy will grow at a much lower rate next year, after this year’s disaster-driven recovery. The reasons for this continued softening of the economy have been manifold. Exports have been affected by political tensions with China, the Euro-zone’s continued deceleration and the still relatively low demand from the USA, and these factors, together with slowing domestic demand — after consumer incentives ran out — have been pushing economic activity lower. Added to this, the high sovereign debt level of the economy and consequently the political standstill on the decision about a further stimulus package do not offer much room for an early strong recovery.

Elections have been set for 16 December and it now seems unlikely that the present Government will be supported by the electoral vote, with the country’s Liberal Democratic Party (LDP) being ahead in the most recent polls. Along with this, the expectation had built up that there would be a further monetary stimulus, because the LDP supports this strategy. However, as the past has shown that the monetary route is not necessarily successful in terms of growth, it remains to be seen whether this has any significant impact. What it could do, however, and it is the aim of the LDP’s leaders to pursue such a strategy, is to increase inflation, since the economy has been facing deflation for most of the past 17 years. The fight against deflation has been made into a core-topic by the LDP. It has called for unlimited monetary easing from the Bank of Japan to achieve an inflation target of 2%. Working together across all parties, however, would be necessary, because a victory for the LDP in the lower house elections would still leave Japan with the problem of a hung Parliament, since the currently leading Democratic Party of Japan is the largest party in the upper house. Overall, the elections in Japan, in combination with the newly installed leadership in China and the upcoming elections in South Korea, could have a profound impact on the near-term political landscape covering these three economies.

Exports continued to fall in October, dropping by 6.5% year-on-year (y-o-y), which was slightly better than the September figure of –10.3%, which in turn had been the steepest fall since April 2011; nevertheless, this constitutes the fifth consecutive month of decline in this very important area. While imports also fell, by 1.5%, the trade balance remained negative at 551 billion yen on a non-seasonally adjusted base. Export-dependent Japanese manufacturers have also struggled to contend with the effects of the yen’s sharp rise in value. And so the most recent decline in the value of the yen, which again pushed it above the ¥80.0/$ mark, could come as light relief. However, leading indicators are not too encouraging for the coming months.

On top of this, retail sales fell by 1.2% y-o-y in October, which was much worse than the September level of 0.4% and the largest decline for almost a year. This decline came after a strong August figure of 1.8% y-o-y, when there was still support from consumer incentives. Industrial production continued its slide, declining by 6.8% y-o-y in October, which was the same rate as in September, which in turn had followed a decline of 4.7% in August. The indications for future production also point to a continued deceleration, with machinery orders — as a lead indicator for industrial output in the coming months —declining by 7.6% y-o-y in September, after a drop of 5.6% in August. The Purchasing Managers’ Index (PMI) for manufacturing fell again in November and remained below the growth-indicating level of 50 for the sixth consecutive month at 46.5, compared with 46.9 in October. However, the services sector PMI offered some brighter reading at 51.8 in November, the first time it had been above 50 since April and indeed the highest level it had been since then. This pushed up the composite PMI to almost the 50 mark, standing at 49.9 in November.

Despite the current lacklustre momentum of the Japanese economy, there is the possibility that it could gain some momentum again trade in 2013, if the country’s major trading partners continued to recover and if the disputes with China could be solved. Given the GDP-revisions of the first two quarters and the lower-than-expected growth in 3Q12, GDP growth expectations have been revised down from 2.2% to 1.6% for this year and from 1.1% to 0.6% in 2013.

Some improvements in the Euro-zone’s economy led to a lower-than-expected decline in the third quarter. This momentum to the upside came from a relatively low level of economic activity, even though growth remains in negative territory at least for this year; but an improvement in global trade and a further rise domestic demand could provide the basis for at least slight growth in the coming year. In the meantime, more pessimistic views on next year’s growth have been published. The latest forecast from the OECD Secretariat assumes next year’s growth rate in the Euro-zone at only – 0.1% and the European Central Bank’s (ECB) most recent forecast presents a figure of –0.3%, while the Bundesbank has revised down its forecast for Germany to only 0.7% for this year and 0.4% for 2013.

One of the recent support factors has been the announcement of the ECB’s Outright Monetary Transaction programme (OMT), which has been able to push down the sovereign debt rates of the ailing economies, including Spain and Italy, to lower and more reasonable levels. Moreover, emergency facilities for economies which deal with sovereign debt issues have been implemented, and these should provide some relief too. This, in combination with improving global trade, has provided some support factors to a gentle rebound from this year’s trough levels. It is obvious that many challenges remain for 2013. However, the measures that have been undertaken to improve the economic situation should provide some support for growth in the coming year.

While Euro-zone leaders have agreed on a compact for growth in mid-year, the recent summit in October and the meeting of the Finance Ministers in November have not supported this strategy at large. The diverging views among members on how, in detail, to allow the European Commission to control mainly the fiscal side and the banking system seem to be too big at the moment. Without the implementation of the necessary harmonization of the fiscal side, it is not clear how the Euro-zone will be able to manage its crisis in the long term. The recently announced support by the European Central Bank will not be enough and, if the situation in the peripherals and particularly in Spain and Italy worsens again, a continuation of the recession seems possible next year and its consequent impact on the global economy might be felt again. Most importantly, the Euro-zone — as has been pointed out on several occasions recently, including by the International Monetary Fund (IMF) — needs to move back into solid growth territory in order to be able to pay back the debt it has accumulated. It should be able to do so, given its strong industrial base in the more advanced economies, as well as via transfers and support for building up a growth base in the peripherals, but political deadlock — at least currently — is not pushing the agenda forward.

Spain’s ten-year Government bond yields have fallen from average peak levels of 6.8% in July to 5.6% in October. It is still not clear whether Spain will apply for the support of the emergency umbrella of the Euro-zone, because it currently seems that its intention is to sidestep a bailout. This could end up in an even worse situation as yields might rise quickly in a once again deteriorating real economic situation. The budget deficit has increased in the meantime and even the lower yields at best neutralize the increased financial needs. Therefore, if yields move back to more elevated levels, the result for the economy could mean a worsening of the present situation, and a request for the support package would be inevitable.

The ECB has again kept its key policy rate at 0.75% at its December meeting, but, with a continuation of the slowdown, it might reduce the rate further to 0.5% in the coming months. Such a rate-cut might be triggered also by the dire situation in the credit sphere. Lending by financial intermediaries to the private sector has been negative since the beginning of the year and it reached the highest decline on record on a yearly basis in September at –1.1%. This decline was even bigger than that of September 2009, when Lehman Brothers went bankrupt. The October figure is slightly better, but still deep on the negative side at –0.7%. Mortgages generally have picked up and increased by 1.2% year-on-year (y-o-y), compared with 0.2% in September. Credit to non-financial corporations in the Euro-zone declined by a stunning 2.5%, a new record low this year. This is hardly supportive at a time when industrial production is decelerating and leading indicators — although improving slightly — point to a continued deceleration.

For the time being at least, the debt issues seem to be contained somehow and the real economy — while still in negative territory at large — seems to improve slightly. With better-than-expected third-quarter (3Q12) growth and a better purchasing managers’ index (PMI), there is the possibility that 2013 will improve on this year. However, after reviewing the latest trend for industrial production, it becomes clear that the situation remains fragile.

Industrial production has declined for 11 consecutive months, reaching its largest figure in September at –2.9% y-o-y, following –2.1% in August. The main indicator of future developments with production — the PMI — points to some improvement in the near future, while still highlighting the negative trend, since the figure remains below the growth-indicating-level of 50. The latest PMI figures for manufacturing, published by Markit, stood at 46.2 in November, up from October’s 45.5. The PMI for the services sector also improved, to stand at 46.7, from 46.0 in the previous month. This gentle positive trend has lifted the composite PMI to 46.5 from 45.7. It seems that much more momentum will be needed to lift the index above the 50-mark and get the economy growing again. This low industrial activity has led to another record unemployment rate of 11.7% in October. As has frequently been the case in recent years, Spain again has the highest rate at 26.2%, with youth unemployment at an exceptional 55.9%. This compares with Germany’s lowest recent rate of general unemployment of 5.4%, reflecting the differences in the strength of the economies within the Euro-zone. Youth unemployment for all this region stood at 23.9%, also a new record. Consequently, retail trade growth has been negative now for every consecutive month for more than a year, with the latest figure for October declining by 2.8% y-o-y, the largest fall since September 2009.

Considering the severe challenges that the Euro-zone economy is facing, the low level of decline raises hopes that the economy might move into positive territory in the coming year. However, this positive assessment will need to be reviewed in the first quarter, after the current quarterly performance is completed, allowing the leading indicators to offer a better perspective on the performance in 2013. In the meantime, the forecast for 2013 remains at 0.1% growth, while that for 2012 has been revised up by a slight 0.1%, from 0.5% to 0.4%.

Emerging markets
China's economy is showing signs of reviving after a mid-year slump. Industrial production, retail sales and exports all accelerated in October, and the authorities took steps to boost liquidity in the economy. Recent data, however, offer some encouragement that the industrial production cycle may now be turning, at least in China, which should act as a bellwether for the rest of the region. After stabilising in September, industrial production, investment and retail sales picked up in October (EIU, December 2012). Growth in Latin America is forecast to slow to 2.6% in 2012, down from 4.4% in 2011. Activity in the region has been adversely affected by the debt crisis and recession in the Euro-zone, as well as slower growth in China and the sluggish performance of the US economy. A growth rate of 1.5% is forecast for Brazil, which is weighing on regional as well as EM growth this year. Adjustments have been made in the 2012 and 2013 growth forecasts for Eastern Europe following revisions to our Euro-zone growth forecasts. Economic growth in the Middle East and North Africa will be constrained in 2012 in anticipation of economic stagnation or even contractions in several economies of the region. However, high oil prices and somewhat higher output will sustain strong rates of growth in the oil producing countries.

The weak global environment continues to have a negative impact on emerging markets across the globe, including Latin America. Latin American growth will slow for a second successive year in 2012. However, it is widely accepted that the recent slowdown in Latin America is a cyclical rather than structural phenomenon as fundamentals in these economies remain strong. However, according to the 2013 “Doing Business” report released by the World Bank, Latin America continues to lag behind most of the world in the quality of its business environment. Amongst the 33 countries included, not one make the top 20 in the 2013 report. The best regional performer is Chile, which is ranked 37th out of 185, and only another handful of economies are in the top 50 (Puerto Rico, Peru, Colombia and Mexico are ranked 41st, 43rd, 45th and 48th, respectively). Brazil, the region’s largest economy, also remains a difficult place to do business from a regulatory point of view, despite two decades of market reforms. The country ranks 130th, losing some ground from 2012 in the general rankings.

Third quarter results for the biggest banks illustrate a rapidly changing environment for banking, in the wake of the unprecedented policy easing cycle implemented by the central bank, which has cut the benchmark interest rate from 12.5% in August 2011 to 7.25% in October 2012. The latest results show a sharp drop in the return on equity of Brazil’s two largest private banks. The government and the central bank have indicated their intention to maintain the Selic rate at 7.25% for a sufficiently prolonged period. It is claimed that two structural changes justify sustained low interest rates in the economy; a fall in Brazil’s neutral interest rate — the rate consistent with a monetary policy stance that is neither expansionary nor contraction — and a decline in the nonaccelerating inflation rate of unemployment (NAIRU). The impact of the changing environment is already evident in bank’s profitability. This policy change, if sustained, could lead to increased lending in sectors where previously financial institutions were reluctant to operate. Housing and real estate are such sectors. Lower interest rates could sustain Brazil’s housing boom which began in 2007.

The government defeat over its proposed changes to the oil royalties bill in Congress has again exposed the limited influence of the administration of president Dilma Roussef in Congress. The controversy over oil royalties has intensified since large oil reserves were found off the Brazilian coast in recent years. Finding the best way to share the new potential wealth has led to a fierce battle in Congress between oil producing states and other states that do not produce oil but want greater resources.

The strong call for reform issued last week by premier-designate Li Keqiang, who acceded to number two in the Communist Party’s new Politburo Standing Committee in mid-November, was the first clear affirmation that the administration of Xi Jiping, appointed as the Party’s General Secretary, intended to push through significant changes over the next decade. Mr. Li is quoted as saying “reform is still the biggest bonus for China. We have benefited from reform in the past 30 years. We have to march on as there is no way back…we have to face challenges and break all the systematic obstacles that block scientific development.” Such words are clearly a sign of new leadership and have a clear message to push for ground-breaking reform aimed at creating a mature, market-oriented economy (FT, China Confidential, 29 November 2012). Continuing in this reformist vein, Mr. Li has said recently that the Chinese economy would be further opened to foreign companies, thus bringing more opportunities for cooperation between China and other countries.

Aside from policy signals, the real economy appears to have performed strongly in November, with manufacturing activities rising significantly. Several other readings reinforced a sense of robust activity in real estate. Home transitions in 54 major cities reached 236 units in November, posting month-on-month growth of 30.6%. According to the China Index Academy, in the week to 18 November, 36 of 40 monitored cities saw home transitions go up y-o-y with the northeastern city of Harbin posting the biggest rise of 971.7%. Meanwhile, in spite of the obvious rebound in the economy in October and November and given the expectation that this robust phase will carry through to December and the start of 2013, inflationary pressures remain fairly subdued.

China's macroeconomic indicators have improved in recent months, helping industrial profit to turn around. Not only did total industrial sales revenue grow to 10.3% compared to one year ago but total industrial profits rose 0.5% over the first 10 months of the year (JP Morgan, November 2012). Among the major industrial enterprises, industrial profits in the state-owned sector fell 9.2% during January- October, while sales revenue rose 5.3% over a year ago. On the other hand, industrial profits at domestic private enterprise continued to outperform, up 17% over a year ago in October, with sales revenue rising 16.8% y-o-y. For much of this year, the weakening in corporate earnings has been as one of the significant constraints on corporate capex and overall fixed investment growth. In addition to improving signs from the bottom up, enterprise level sales and profits data, we have observed some early signals that the corporate sector’s de-stocking process is likely near an end, as suggested by the stabilization in the manufacturing PMIs finished goods inventory component in recent months (JP Morgan, December 2012).

India’s economy decelerated for a fourth successive quarter in 3Q of 2012, signaling a downward move toward the long term trend of the country’s economic growth. Agricultural production is likely to suffer further on account of the sub-par monsoon, while government spending will be restrained by a shortfall in revenue. On the other hand, infrastructure investment is likely to get a much needed boost as the government finalizes plans for the National Investment Board. Exports also are believed to increase in coming months on the back of slowly improving global economy. However, a main obstacle in the way of public investment expenditure to boost aggregate demand has been the huge budget deficit that amounts to 6% of GDP in 2012. The government has stepped up effort to rein in budget deficit but reducing the budget deficit in the short run could be hard to achieve. Although policymakers as well as lawmakers are increasingly concerned about a ballooning budget deficit and its adverse effects on economic growth, it is obvious that elevated inflation levels would make it very difficult to push for bold and far-reaching fiscal reform, including raising the subsidized fuel prices and privatization of governmentowned companies in the short-term.

According to the EIU (December 2012) non-seasonally adjusted factory output contracted by 0.4% y-o-y in September. India’s industrial production data are subject to revision and should therefore be read with some caution. Capital goods output declined by 12.2% y-o-y, marking a slight improvement over the average contraction of 13.2% in the earlier quarter. High nominal interest rates continue to deter capital investment and persistent inflation means that the central bank is unlikely to ease monetary policy. Although investor and business sentiments received a boost from a recent bout of economic reform, these measures are yet to be enacted in full.

The government is aiming for a budget deficit of 5.3% for the current fiscal year and to reduce it to 3.0% by fiscal year 2016/17. Although the fiscal consolidating plan lacks details, analysts see the move as a step in the right direction. The central bank has called for credible deficit reduction before it will consider further interest rate cuts. However, the central bank did reduce bank’s required ratios to make more liquidity available for investment and expansion of economic activities. With wholesale inflation accelerating to 7.8% y-o-y in September, reaching a 10-month high, there is limited scope for further monetary easing. Our estimate for Indian economic growth for this year is thus downgraded to 5.5% from the previous 5.7%; and considering the huge potential of the economy, we think it could rebound to higher rate of growth approaching to 6.6% next year.

The Federal Statistical Services has announced a 2.9% GDP growth in Q3 on a y-o-y basis. This is the slowest rate of growth since 2009. In September, agricultural output contracted 7.7% as severe drought left crops depleted. In addition, fixed capital investment dropped for the first time in 18 months, as a slowdown in China and recession in Europe persuaded many firms to scale back spending. Household purchasing power was hit by a pickup inflation throughout Q3, as reflected in a drop in retail sales growth. The October PMI survey for services also advanced to 57.3 from 54.5 in September despite a fall in export orders indicating that this sector might be regaining momentum as the economy enters Q4.

The Russian central bank has held the refinancing rate at 8.25%, following a 25 basis points rate increase in September. It seems that recent downbeat readings on the economy discouraged further monetary tightening. A slowdown in inflation to 6.5% in October also influenced its decision. However, the cost of food may rise on the back of a poor grain harvest, which could keep consumer price increase above 6.0% over the next six months. Meanwhile domestic demand continues to decelerate with real investment falling year on year. A range of data released in September confirms that domestic demand growth is decelerating as rising inflation erodes the purchasing power of consumers. As a result, real wages growth slowed to 6.6% y-o-y in September from 11% in the first half of the year. Retail sales volumes increased by 4.4% on annual basis. The economics ministry has blamed monetary tightening by the central bank for the slowdown in demand growth. A sharp reduction in loan growth and rise in the cost of borrowing have contributed to the decline in investment. However, the domestic demand trend has yet to have a significant impact on output. The latest trends in demand make it more likely that the central bank may keep interest rate on hold in the near future (EIU, December 2012).

Asia Pacific
There are increasing signs that the Asia Pacific’s manufacturing sector is slowly taking a turn for the better. In Indonesia, manufacturing activity continues to grow, but a bit more slowly, with the HSBC’s PMI registering 51.5 last month, compared with 51.9 in October. In Vietnam, the sector started to expand in November, with the PMI picking up to 50.5 from 48.7 in October; this was its highest level since September. Thailand’s industrial production surged by 36.4% year-on-year (y-o-y) in October; this impressive growth rate primarily reflected the base effects from last year’s flooding. According to newly released official data, Vietnam recorded a modest US$50 million trade deficit in November, but registered a trade surplus of just over $1.0 billion during the first 11 months of 2012. In November alone, merchandise exports are estimated to have totalled $10.20 bn, up 15.2% y-o-y against imports of $10.25 bn (up 8.8% y-o-y). Inflation, on the other hand, seems to be getting under control after a period of tight monetary policy in the region. In Indonesia, the headline consumer price index (CPI) inflation rate retreated to 4.3% y-o-y in November from 4.6% the month before, signalling that inflationary pressures in the economy remain tame, despite robust growth (the economy grew by 6.3% y-o-y during the first three quarters). This opens an opportunity for monetary authorities to ease their policies, helping stimulate growth next year. As widely anticipated, the Monetary Policy Committee of the Bank of Thailand voted to leave the policy rate unchanged at 2.75% at its regularly scheduled meeting on 28 November. The decision was unanimous and followed a surprise rate cut at the October meeting, which has since been described repeatedly as a one-time “insurance” against external headwinds.

Uncertainties about external demand still threaten recovery in the region. Trade deficits in many countries in 2012 are increasing, as a result of slowing exports to the troubled economies of the USA and Europe, together with a slower-paced China, while imports, albeit tending to go down, are still higher than exports due to robust domestic demand. Hong Kong’s merchandise exports fell in October, following a strong rebound in September, as demand from Europe remained weak, while shipments to the USA contracted again.

Faced with difficult external and internal environments, growth in the roughly defined MENA region’s (Middle East/North Africa) oil-importers — Djibouti, Egypt, Jordan, Lebanon, Mauritania, Morocco, Sudan and Tunisia — will be just above two per cent in 2012. However, most of these countries will witness higher public spending next year to stimulate growth, but at the cost of rising deficits. Tunisia’s 2013 draft budget sees Government expenditure rising to 26.6 bn dinars (US$16.7 bn) in 2013, up from TND 25.4 bn in the supplementary 2012 budget. This represents an increase of 4.7% in state spending. According to the finance ministry, the budget plan is based on economic growth of 3.5% next year, with a projected budget deficit of 5.9% of GDP, down from a gap of 6.6% in the 2012 budget.

Despite the tight monetary policies in the region, inflation has been edging up recently. Morocco’s CPI inflation rose 0.6 percentage points to an annual rate of 1.8% in October, led higher by a 2.8% month-on-month (m-o-m) increase in education prices, according to the High Planning Commission. Lebanon’s consumer price inflation climbed to 11.2% y-o-y in October, up from 10.3% in September, according to data published in November by the Lebanese Central Administration of Statistics. CPI inflation in Oman, an oil-exporter, rose moderately in September to an annual rate of 2.7%, from 2.4% a month earlier, according to data from the Ministry of National Economy.

On the other hand, Governments in the region are attempting to implement different measures to reduce fiscal deficits, especially in the oil importing countries, such as by cutting energy subsidies, despite widespread public protests. Starting on 14 November, the Jordanian Government has decided to cut subsidies for various staple fuel products. The cost of cooking gas will rise from 6.5 Jordanian dinars (US$ 9.2) to JOD 10.0 per canister, an increase of more than 50%. Gasoline (petrol) prices will rise from JOD 0.71 to JOD 0.80 per litre, and kerosene and diesel prices are also set to rise. In undertaking these actions, the kingdom is attempting to prevent the fiscal deficit from widening further.

Subsaharan Africa
The Institute of International Finance says that Sub-Saharan African economies have enjoyed the second-fastest growth rate in the world for the past decade, and this trend looks set to continue. The region is in the midst of ‘transformative growth’. It could move from accounting for only 4% of world GDP in 2010 to 7% by 2040 and 12% by 2050. Growth has been fuelled by commodities, but that is changing rapidly as wealth per capita increases and new industries develop. Downside risks are the fragile global recovery and the potential of a slowdown in China.

Latin America without Brazil
Recent economic indicators from the region highlight the robust recovery of many Latin America countries and the decoupling from economic problems facing Brazil and Argentina. Peru and Chile posted growth of 6.5% and 5.7% respectively in the third quarter, compared with the year-earlier period. Colombia’s economy grew by 4.9% during the second quarter, compared with the 2011 period. Mexico’s economy grew by 4.2% during the year’s first nine months versus the year-earlier period — this was nearly three times the rate of Brazil. However, Argentina grew by just 2.4% in the first half of the year, compared with a year earlier.

OPEC Member Countries
The Central Department of Statistics and Information reported that the Kingdom of Saudi Arabia’s CPI with base year of 1999=100 witnessed a slightly higher annual inflation rate in October of 3.8%, compared with 3.6% in September. The National Bureau of Statistics has reported that CPI inflation in the United Arab Emirates (UAE) eased to a 0.5% annual rate in October, after holding above the 1% mark in the previous two months. Kuwait's CPI inflation dropped to 1.9% y-o-y in September from 2.8% in August, according to data published by the Central Statistical Office on November. Consumer prices actually grew by 0.2% m-o-m, following 0.1% growth in August, so the large drop was due to favourable base effects, as expected.

After accelerating slightly, in both monthly and annual terms, the rigour of Iraqi consumer price increases lost some steam in October. According to figures released by the Central Organisation for Statistics and Information Technology, CPI inflation increased to 4.8% y-o-y in October, the slowest observed rate since November 2011.

Oil prices, US dollar and inflation
The US dollar increased against all the major currencies in November — by 1.2% against the euro, 0.8% against the Swiss franc and 0.7% against the pound sterling. The performance vis-à-vis the yen was more significant. Here, it gained 2.3% and the yen is now trading again clearly above the critical level of ¥80/$. It averaged ¥80.792/$ in November and has moved higher again since the beginning of December, when it reached a level of up to ¥82.50/$.

The euro-US dollar exchange rate averaged $1.2820/€ in November. The handling of the fiscal cliff in the USA and the near-term future developments with the Euro-zone’s sovereign debt situation will be the two major forces that will influence trading patterns over the coming weeks. Furthermore, while it seems that there is more room on the downside for the euro, the challenges facing the USA to continue expanding at only 2% annual growth amid the fiscal issues and the consequent drag on the currency should not be underestimated.

In nominal terms, the average price of the OPEC Reference Basket fell by $1.50/b or 1.4% from $108.36/b in October to $106.86/b in November. In real terms, after accounting for inflation and currency fluctuations, the Basket price fell by 0.3% or $0.18/b to $65.87/b from $66.05/b (base June 2001=100). Over the same period, the US dollar gained 0.9% against the import-weighted modified Geneva I + US dollar basket, while inflation declined by 0.2%, offsetting the relative effect in the change of the nominal to the real value.

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