World Economy - May 13

Industrialised countries
US
The US economy is currently enjoying some positive momentum in its underlying economy. Wealth creation factors in the labour market, the housing sector and the equity market have turned out to be relatively supportive for the economy, and private household consumption is continuing to grow at solid rates, counterbalancing the negative effects of fiscal contraction. This positive development has so far been very well supported by the monetary policy of the Federal Reserve Board (Fed). The Fed has confirmed it will continue to be accommodating as long as necessary, while in general it must be accepted that there are certain risks to the Fed’s policy, which currently seem worthwhile for the Fed to take. The drag to higher growth levels comes mainly from the fiscal consolidation that has been implemented this year and is estimated to have a negative impact of around 1.5 percentage points (pp).

Poor budget cuts under the sequester, combined with uncertainty about ongoing budget negotiations in Congress and discussion on the looming necessity to lift the debt ceiling after 18 May are the main aspects that seem to be holding back growth in the current year. It will be important to watch the development of fiscal retrenchment negotiations and indeed close monitoring will also be required to gain an idea of growth levels in the coming year.

Given this situation, the most recently published first quarter GDP number of 2.5% annualised and seasonally adjusted quarterly growth is a solid growth level. It is considerably higher than the 0.4% seen in 4Q12 and almost matches the largely governmentally driven 3.1% in 3Q12, with the difference being that this time governmental spending declined by 4.1%, while in 3Q12 it rose by 3.9%. However, economic momentum in the current quarter is estimated to have slowed down and led to an estimated 2Q13 growth forecast of 1.5% to 2.0%. The first estimate will be published at the end of July. It will also be very interesting to learn about the major GDP revision by the Bureau of Economic Analysis (BEA), which will be published around the same time. These revisions will include newly added GDP items that are estimated by the BEA to lift GDP by around 3% and which could have some impact on GDP numbers going back to 1929.

The Fed has highlighted in recent months that the most important guideline in the current economic environment for its monetary policy decisions is development of the labour market. While so far improvements in the labour market have been slow, the latest April report provided some encouraging signals when compared to previous reports. Recovery will most probably remain choppy, but it has again underscored the relative robustness of the US economy. The unemployment rate declined to 7.5% and non-farm payrolls rose considerably by 165,000 in April, after a revised number of 138,000 in March. Moreover the share of long-term unemployment declined from 39.6% to 37.4%, the lowest level since November 2009. With improvements in the labour market, consumer confidence has also increased. The consumer confidence sentiment index of the Conference Board moved from 61.9 in March to 68.1 in April. This is historically still very low, but the trend in actual spending as part of the GDP stood at an encouraging 3.2% annualised and seasonally adjusted quarterly rate, the highest since the first quarter of 2011, so the improving trend in sentiment should be supportive for the near future.

This positive — though currently slightly decelerating — momentum is also confirmed by the Purchasing Managers’ Index (PMI) for the manufacturing sector as provided by the Institute of Supply Management (ISM), which issued a decline from 51.3 in March to 50.7 in April. The PMI for the services sector — which constitutes more than two-thirds of the economy — fell from the very high level of 54.4 in March to 53.1 in April.

The very important housing sector improved significantly over the past months and while last month’s data has been mixed, the trend has again improved this month. After pending home sales unexpectedly fell by 1.0% m-o-m in February, they rose by 1.5% m-o-m in March, according to the National Association of Realtors. Pending home sales are considered to be a leading indicator of progress in real estate because they track contract signings. Positively, the yearly change of the federal housing finance agency (FHFA) house pricing index has continued its rising trend at a monthly price rise of 7.7% y-o-y in February, after 6.7% y-o-y in January, the largest increase since June 2006.

This year’s fiscal drag is forecast to lead to muted growth in 2013. GDP is expected to expand by 1.8%, unchanged from the previous month’s estimate. While the positive trend in the labour market and housing sector are encouraging, it remains to be seen if the momentum will continue.

Japan
Since the newly elected government has shown its willingness to push the economy out of its deflationary corner and lift growth levels beyond its current potential of around 1%, expectations for this year’s economic performance are high. After years of almost no growth, Japan remains at absolute GDP levels around those of 2007. While there certainly is the possibility of a further boost to the currently low growth potential, it is not yet obvious whether the outcome will be as great as is hoped, and many counter-arguments remain.

The core aim of the monetary strategy is to end deflation and to be able to consistently produce an inflation rate of around 2%. To achieve this, the Bank of Japan (BOJ) has diverted from its main monetary management mechanism — interest rate setting — to focus mainly on the quantity of the monetary base. With this strategy it intends to double the monetary base by 2014, moving it from a current ratio of around 30% to GDP to more than 50%. However, without a relative increase in wages an inflationary increase could backfire. Moreover, it should be highlighted that an economy like Switzerland’s, with more than 80% of its monetary base to GDP and inflation has remained negative since October. This should provide some evidence that such a strategy — without additional measures — does not necessarily help. Furthermore, a ratio of around 30% of the monetary base to GDP is already quite high. It compares with less than 20% in the US; it seems monetary expansion in Japan has only met with limited effect. The weakening of the yen as part of this strategy has already been commented upon by other G20 economies as a dangerous intervention, and it is also negatively impacting fossil fuel import prices; higher imports became necessary after a move away from nuclear energy following the triple disaster of 2011. Finally, the sovereign debt level remains the highest of all developed economies, and while the central bank will be able to digest some of this debt pile, it will require repayment and this could cause serious spending cuts for the government earlier rather than later, again hurting growth potential. These many unknowns will need to be carefully monitored in the near future.

Thus, Japan’s economy is forecast to be mainly driven by large monetary stimulus, soon expected to be accompanied by further fiscal stimulus and structural improvements. Data for the first quarter provide some signals that government-led support is creating higher output, but much more momentum is needed to achieve current growth expectations. Leading indicators are fuelled by encouraging government prospects and point to rising output in the second quarter. It is too early to determine to what extent government efforts will materialise in additional economic growth.

After two negative quarters of export growth, 1Q13 growth was up by 1.2% y-o-y, a 6.0% quarterly rise; the decline of the yen versus the US dollar by almost 30% since November last year seems to have been an important support factor. Retail trade remained negative in March. After a fall of 2.2% m-o-m in February and a decline of 1.1% m-o-m in January, it was again lower by 0.3% m-o-m in March, leading to a yearly decline of 1.2% in 1Q13. Industrial production increased slowly each month, reaching 0.3%, 0.5% and 0.2% for the first three months of the year. Machinery orders remained negative at -8.4% y-o-y in February. However, business and consumer sentiment indices have a positive outlook for the remainder of the year. The purchase managers index (PMI) for manufacturing remained above the 50 line for the second time in April, reaching 50.4 in March and 51.1 in April. Consumer confidence climbed to 44.8 in March, its highest level since June 2007, based on numbers provided by the Cabinet Office.

Positive developments in exports and significant improvement in leading indicators have led to a revision of the 2013 growth forecast from 0.8% in the past month to 1.1%. However, it must be noted that many uncertainties prevail and future development needs to be carefully monitored.

Euro-zone
The Euro-zone’s economic development has not improved much lately and it remains to be seen whether the economy will recover in the second half as currently estimated. Leading indicators point to a continued slowdown, industrial production is not improving, unemployment is at a record high and the transmission channel for the ECB’s relatively accommodating monetary policy remains impaired. The economy has declined since 4Q11, though it is forecast to rebound by this year’s third quarter, when it should produce positive growth on a quarterly basis. However, as the crisis has reached its core economies — Germany and France — it should not be ruled out that the economy’s serious condition will continue for longer than currently expected. The labour market — with the exception of Germany, Austria and Luxembourg — indicates that the economy is dealing with grave issues that will need a lot more time to heal. This distressed situation of the labour market in particular, in combination with the fading impact of monetary stimulus, which suffered a low response rate from the real economy, has led to the conclusion that austerity has not and will not necessarily lead to a turnaround in the short term. As the International Monetary Fund (IMF) pointed out on some occasions, and reflected in April G20 discussions, it may be important for economies which can afford it not to cut governmental spending further to the point at which future growth is significantly impaired. With some shift in the strategy of the austerity policy, which has been mainly driven by Germany, it is possible that the economy may find its way back sooner rather than later to careful growth. It is too early to say if such a shift will be supported and if so, then most likely after the German elections in September. Austerity — along with other measures — has certainly led to the regaining of investor confidence and more reasonable sovereign debt risk premiums. However, at debt ratios that are much lower now than the average of advanced economies in the Euro-zone and particularly in certain economies, it seems there is some room for maneuvering. The IMF estimates that austerity measures will lead to a budget deficit in the Euro-zone of 2.9%, compared to 4.7% in advanced economies and the 2013 US deficit of 6.6%. In this regard, it should be highlighted that in 2012 Germany and France already experienced higher growth rates in public spending than in private spending. In Germany, government consumption expanded by 1.4% in 2012, while private consumption grew by 0.6%. In France, the rates stood at 1.4% compared to -0.1%, respectively. The latest comments by the President of the European Commission that austerity measures have reached their limit were echoed by the French Finance Minister, who also advocated more fiscal flexibility. The newly installed government in Italy also highlighted the need to reform the tightness of the austerity policy in the Euro-zone. The German Finance Minister has already accommodated these arguments, recently stating that more flexibility — particularly in the cases of France and Spain — could be envisaged, and that the matter will be taken into consideration in upcoming European Council meetings of European Union Leaders and Finance Ministers at the end of May.

Industrial production in the Euro-zone has declined since November 2011, reaching its biggest drop in November of last year at -3.8%. In February, the decline stood at 2.7%, the highest in the past three months. The labour market continues to be in a very challenging stage and private household consumption is experiencing a decline. The unemployment rate moved up to 12.1% in March, the highest on record, while youth unemployment stood at 24.0%. Among the larger economies, Spain again recorded the highest unemployment rate at 26.7% for general unemployment and 55.9% for youth unemployment, both unsustainable in the long-term. Consequently retail trade remained negative for the 23rd consecutive month at -2.2% y-o-y in March, the largest decline in 1Q13. Leading indicators do not offer a lot of hope for an improvement in the situation any time soon. The main indicator for future production developments — the Purchasing Managers’ Index (PMI), published by Markit — highlights problems in the economy, which remained clearly below the growth indicator level of 50 at 46.9 in April, almost the same level as in March.

Taking the current declining momentum into consideration, the Euro-zone’s growth forecast remains unchanged at -0.5% for 2013 with no current indication for improved annual performance. This, however, takes into consideration some recovery in the second half. It remains to be seen to which extent the economy will manage to rebound, but it will certainly require the larger economies of Germany and France to improve first, with the others following.

Emerging markets
After a slowdown in 2012, emerging and developing economies are poised for stronger growth in the current year. Weakness in the advanced economies, and slower growth in China has been curbing exports in recent months, but as the US and Chinese economies are expected to improve and Europe to stabilise, demand for emerging market exports should start to rise again. China should record substantially better growth of 8.0% this year. This number is fractionally down from the last forecast of 8.1%, reflecting the recent tone of policymakers as well as some softness in the latest data.

Eastern Europe's transition economies continue to be challenged by close links with the troubled Euro-zone and the lingering effects of the 2008 credit bubble burst. This month, slight downward revisions were made to the 2013 GDP forecasts for Eastern Europe, in keeping with weaker prospects in the Euro-zone, a key trading partner and source of investment and financing. Russia’s growth assumption, in particular, has been revised from 3.4% to 2.9%.

Growth in Latin America weakened last year, also triggered by the Euro-zone recession and the slowdown in China. However, it seems that the Latin American slowdown is cyclical rather than structural. We expect growth to pick up to 3.4% this year for the region, supported mainly by Brazil’s recovery from a very low growth rate of 0.9% in 2012 to 3.0% for this year.

Economic growth in the Middle East and North Africa will weaken slightly to 3.1% in 2013, in part because the impact of a host of earlier fiscal stimulus measures will ease and Libya’s growth pattern — which saw a significantly large recovery in the last year is distorting the pattern. This headline figure also masks a considerable divergence between positive prospects for oil-producing countries and mostly negative prospects for non-oil producing economies.

The first BRICS summit held in South Africa highlighted the growing importance of this informal group comprising Brazil, Russia, India, China and South Africa. It was the first time the summit was held on African soil (and the group's fifth in total), taking place in Durban on 26-27 March, thereby also signaling the growing importance of the African continent.

Brazil
Brazilian manufacturing production expanded in March by 1.0% y-o-y after falling in February by 0.8% y-o-y, reflecting higher volumes of incoming new work from both domestic and international clients in the past months, though most recently new orders have eased again and input costs rose at their fastest rate in 22 months. Moreover, changes in Brazil’s macroeconomic framework, together with heightened policy activism and creeping interventionism and protectionism, are currently undermining confidence.

Tax breaks will hamper the achievement of the primary surplus target, which is currently around 3.1% of the GDP in the medium term, as the government forgoes revenue in exchange for a reduction in overall production costs. The conduct of monetary policy suggests that the Banco Central do Brasil (BCB, the Central Bank) is willing to accommodate inflation in the upper target of the 4.5-6.5 range. Despite the volatility in monthly activity indicators at the beginning of this year, an improvement in sequential growth in 1Q13, with better performance by the manufacturing industry (from the supply perspective) and in terms of investment is expected (from the demand side).

In Brazil, inflation has continued to trend upward despite sluggish economic activity. March’s figure of 6.6% y-o-y breached the 6.5% ceiling of the central bank’s (± 2.0% around the central target of 4.5%) target range.

With mixed signals, but slightly improving indications of late, Brazil is forecast to expand by 3.0% this year, 0.2 percentage points lower than the forecast of the previous month. The still high inflation combined with somewhat slowing commodity prices and elevated capacity utilisation point to some downside risk, so the situation will be carefully monitored in the coming weeks.

China
The People's Bank of China (PBC, the central bank) is gradually shifting away from its accommodative policy stance as inflationary concerns re-emerge. In February, the PBC auctioned its first forward bond-repurchase agreements since June 2012. It remains to be seen how the PBC will manage its monetary policy in the short term, but in the medium term, authorities are committed to a policy of moving away from artificially suppressing interest rates — two rate cuts in mid-2012 were accompanied by measures that relaxed restrictions on banks' ability to set rates freely. The PBC will push for interest rate liberalisation in 2013 as part of a broader effort to move the economy away from investment-led growth, with the result that rates will drift higher. Low or negative returns on deposits have until now allowed cheap loans to be channeled to corporate investors.

Real GDP growth slowed to 7.8% in 2012. Weak demand for Chinese exports and decelerating growth in property investment held back economic expansion, but strong growth in income continued to support private consumption. Looser monetary policy and investment in government-backed infrastructure projects drove acceleration in real GDP growth in the fourth quarter of 2012. With first quarter GDP expansion at only 7.7%, the momentum has slowed in 2013. Moreover, some momentum might also dissipate in the second half of 2013, as rising inflation could prompt a tightening of monetary policy. While it was hoped that upbeat fourth quarter performance signaled the start of a recovery, optimism about the Chinese economy has been tempered somewhat by recent disappointing data. Retail sales, along with industrial production, slowed. After inflation rose in February up to 3.2%, it moved down to 2.1% in March, reflecting a deceleration in economic growth and moderation of global commodity prices. Food and transport costs in China are susceptible to volatility in global oil prices.

Some of the softening in 1Q13 has been accommodated by a 0.1 percentage growth revision. The 2013 GDP growth forecast now stands at 8.0%, compared to last month’s growth forecast of 8.1%.

India
After several false starts, the government undertook a series of reforms beginning in September 2012 to tackle the burgeoning fiscal deficit and create new jobs. In late February, the government presented its last major budget of the current parliamentary term, for the fiscal year 2013/14 (April–March). The administration is attempting to balance its development priorities against the need for fiscal consolidation, and has set itself the ambitious target of cutting the budget deficit to the equivalent of 4.8% of the GDP in the coming year. It is likely to miss the target, which seems to be based on optimistic projections of revenue growth.

The government's budgetary strategy has been repeatedly challenged by a series of unfavourable developments since 2008, from the global financial crisis to a domestic economic slowdown, with the problem being exacerbated by Congress's fiscal profligacy. As a result, the federal government deficit widened from the equivalent of 2.5% of the GDP in 2007/08 to 5.7% in 2011/12.

The pace of economic expansion slowed sharply in 2012/13, owing to a host of domestic factors, including weaker business and consumer sentiment, a poor monsoon season and tight credit conditions. Growth in private consumption (which accounts for more than one-half of the nominal GDP) is estimated to have slowed to 4.1% in 2012/13, its slowest pace of expansion since 2004/05. Government consumption also decelerated to 4.1%, as the administration sought to narrow the fiscal deficit. The high cost of financing appears to have held back investment growth, which is estimated to have decelerated for the second consecutive year, to 2.5%. On a factor–cost basis, agricultural output growth slumped to an estimated 1.8% in 2012/13 owing to the poor monsoon season. Expansion in industrial output decelerated for the second consecutive year, to an estimated 3.1% from an average of 8.2% a year between 2002/03 and 2011/12. Output in the services sector, which accounts for nearly 60% of the GDP, grew by 6.6%, marking a slowdown from an average annual growth of 9.3% in the previous decade. As a result, headline GDP growth on a factor–cost basis is estimated to have slowed to a ten-year low of 5% in 2012/13.

Since September 2012, the government has taken a series of steps to boost the economy. These include moves to lower the public subsidy bill, open up more sectors to foreign investment and fast-track approvals for infrastructure projects. It is expected these measures, combined with a loosening of monetary policy, will enable real GDP growth to rebound to around 6.0% in 2013/14.

Inflation remains a problem, also limiting the central bank’s ability to further stimulate the economy via monetary expansion. This was highlighted when it recently reduced its key policy rate by a further 25 basis points to 6.25%. Inflation in March increased again to 10.4%, slightly lower than the 10.9% in February, but it remains very high. Moreover, the government is attempting to implement its fuel subsidy bill by raising administered fuel prices, forcing bulk users of diesel (such as railway and industry) to pay market prices for fuel and allowing oil marketing companies to raise petrol prices. Food prices, which account for a large proportion of the consumer price index, have risen sharply by 13.0% in the first quarter.

Based on the HSBC Emerging Market report, Indian manufacturing output increased modestly in March, as persistent power shortages hampered production. This has been a significant issue over the past year. The latest industrial production number for February was only 0.5% higher than in the previous year, and the Markit Purchasing Manager’s Index (PMI) confirms a decelerating trend in the manufacturing sector. The manufacturing PMI for April stood at 51.1, the lowest number since November 2011. Unfortunately the very important services sector also seemed to experience a PMI deceleration to 50.7, the lowest level since October 2011.

The growth forecast for this year remains at 6.0%, but future developments need close attention. Currently, is seems there is a downside skew to risk in India, though it is still estimated to expand at a higher level than over the past year, when GDP grew by only 5.0%. The 2013 forecast will be reviewed in the coming month.

Russia
The 2012 federal budget recorded a small deficit of Rb37bn (US$1.2bn), equal to 0.1% of the GDP. Excluding oil and gas revenue, the deficit expanded to 10.6% of the GDP, up from 9.5% of the GDP in 2011. Although the budget remained in surplus until November 2012, the traditional December surge in spending brought it back into deficit.

The Russian Central Bank (RCB) has held the refinancing rate at 8.25% for several consecutive months. It had raised its main rates in September 2012, when inflation breached the 6% upper limit of the central bank's target range after a poor harvest pushed up prices. Growth prospects, however, will remain significantly dependent on international commodity prices.

The slowdown in activity that set in during the second half of 2012 has continued. Industrial production declined in January and was up by only 0.1% in February, while in March it rose again to an encouraging 2.6%. According to estimates by the Ministry of Economic Development, the economy expanded by only 0.1% in February, a significant slowdown from the 1.6% y-o-y growth recorded in January.

Domestic demand growth slowed significantly at the start of 2013, but year-on-year growth in retail sales volume improved again in March to 4.4% from February’s 3.0%. Inflation has recently accelerated and is eroding household purchasing power. The slowdown in retail sales growth is also due to a deterioration of consumer sentiment and a deceleration of credit expansion.

Year-on-year consumer price inflation dropped to 7.11% in March 2013 from 7.38% in February, the first decline in inflation since June 2012. The rise in food prices fell to 8.3% from 8.7% in February, while non-food inflation reached 5.2% (from 5.3% in February) and services inflation lessened to 7.9% (from 8.2% in February). A good 2013 harvest will reinforce the expected downward trajectory for inflation in 2013. While the first two months of the year produced signals that point to lower growth this year, March output has been encouraging. However, the impact of the first two months and somewhat lower global commodity prices — which provide a significant source of income for the economy — have led to a downward revision of Russia’s GDP forecast from 3.4% to 2.9%. Moreover, fixed investment fell after a strong year in 2012 and wage growth slowed to its weakest pace for two years in the first quarter, prompting private household consumption to ease slightly. At the same time it should be highlighted that the Russian government’s GDP forecast has also been revised — to an even larger extent — from 3.6% to 2.4%.

Asia Pacific
The growth pattern in Asia Pacific is mixed, with some economies experiencing a clear deceleration in 1Q13, such as Taiwan, while others softened only slightly, like Indonesia, and some expanded, for example South Korea. In general, the economic outlook is positive for this year, with the somewhat better momentum expected in 2H13 for the global economy.

The Philippines maintained its upbeat stride after last year’s strong growth of 6.2%. A recent decision by Fitch Ratings to upgrade the country’s credit rating to investment status has further boosted sentiment towards the Philippines. However, industrial production in February sharply declined by 1.4% y-o-y, compared to 5.7% y-o-y growth in January. This indicates that the Philippines may also face an overall deceleration in 1Q13.

The GDP in South Korea grew by 0.9% y-o-y, mainly driven by exports and gross capital formation, while industrial production declined in the first three months of the year. The won’s recent increase, combined with the somewhat softer tone in the region and among trading partners in the developed economies, as well as the improved position of Japan due to its lower currency levels, has led to uncertainty about whether progress will continue in the next quarter.

Transition Region
Persistent economic weakness in the Euro-zone has kept the growth forecast for Central and Eastern Europe under downward pressure. Most countries in the region are struggling to avoid a prolonged period of stagnation. In addition, Croatia and Slovenia are set to remain in a recession in 2013, due to a lack of domestic demand. In particular, further sharp declines in gross fixed investment are likely in Slovenia. Turkey represents one of the few bright spots in the region and will see an improvement in the pace of its growth in 2013 of 3.5%, after a growth rate of 2.2% in 2012. March PMI data showed an ongoing downturn in the Polish manufacturing sector, which decreased from 48.0 in March to 46.9 in April and will continue to contract.

Although 2013 is set to be another difficult period for the transition region, conditions are expected to improve as the year progresses, given the assumption that the situation in the Euro-zone will improve in the second half, and that the currency bloc will return to growth by then. An easing of conditions in Euro-zone funding markets, also highlighted at the most recent ECB meeting in May, should loosen constraints on bank financing to Eastern and Central Europe as well.

Africa
The African economy is continuing to expand quickly. In North Africa, the economy in Tunisia is expected to register a growth of 2.8% this year, compared with 2.5% in 2012, related mainly to a rebound in tourism. In Egypt, which is still being held back by political uncertainty, economic growth is expected to reach 2.0% in 2013, compared with 1.9% last year.

Sub-Saharan Africa is achieving higher growth levels currently, fuelled by increasing commodity exports. It will see growth pick up slightly to 4.7% in 2013, after reaching 4.0% in 2012. Several of the oil exporting countries in the region (including Angola, Cameroon, Chad, Equatorial Guinea and Ghana) will benefit from rising hydrocarbon output. New mining production in several countries will also be a positive factor for manufacturing. After lower production levels in March, which were also held back by China’s Lunar New Year holidays, the expansion should recover. The resurgence in Africa’s fortunes, and the uptick in its vital oil, gas and mining sectors has been linked to factors such as the rapid growth of China and other Asian economies.

The first BRICS summit in Africa
The first BRICS summit in Africa in Durban on 27 March reached decisions on three main issues:
1- Establishment of a BRICS bank facilitating trade between the BRICS economies and also at an international level should take place. According to the abovementioned proposal, a total contribution of US$50bn is required, with a $10 bn share coming from each member.
2- Appropriate extra funds for infrastructure investment should be found, hence focusing in particular on raising member funds.
3- Long-term investment is needed, as well as help boosting it.

The summit also approved the creation of a BRICS business council, which will meet twice a year in order to promote business ties.

Latin America without Brazil
Latin America is forecast to grow at higher rates in 2013, supported by an expected recovery in Brazil’s growth and better performance by Argentina, the area’s two largest economies. While Mexico is forecast to slow down from last year’s growth of 3.9% to this year’s level of 3.3%, it will still expand significantly. The whole region is forecast to expand by 3.4%, compared to 2.6% last year.

OPEC Member Countries
At first glance, last year was one of robust growth for OPEC Member Countries. Growth averaged about 5.3% in 2012 and is expected to continue at a somewhat slower pace in 2013 at around 4.2%. However, total growth last year was distorted by an exceptionally strong recovery in Libya, which experienced an 80% y-o-y GDP expansion. This is forecast to slow down to 15% this year. If figures for Libya are removed, OPEC would post an increase in GDP of 3.8% this year, almost in line with the previous year’s healthy growth of 3.9%.

Saudi Arabia’s economy will see a drop in growth from 6.8% in 2012 to 5.2% in 2013 due to a decline in gross fixed capital formation, a trend that started in the fourth quarter of 2012. The UAE economy will also see a slightly lower growth rate of 3.2% this year compared with 4.0% in 2012. Kuwait is forecast to see a drop in growth from 5.2% in 2012 to 4.7% this year, and Qatar’s expansion will decrease from 6.2% in 2012 to 5.2% in 2013. Iraq will continue to expand at 8.3% this year, almost the same level as last year’s growth of 8.5%.

Oil prices, US dollar and inflation
The US dollar in April declined slightly against all major currencies, with the exception of the yen. It fell by 0.5% versus the euro, 1.1% compared to the Swiss franc, 1.5% against the pound sterling and gained 3.5% on the Japanese yen. The impressive development of the US dollar versus the yen continued, and the monthly average rate in March stood at ¥97.710/$, continuing on to reach a level of almost ¥100.0/$ by the beginning of May.

The latest decision of the ECB to lower interest rates has supported the euro. Furthermore, discussion of possible further key policy rate cuts in the near term by the ECB President and the possibility of negative deposit rates combined with the potential to loosen tight austerity measures by policymakers in the Euro-zone have also supported the euro’s value. While the euro was trading again above the $1.30/€ mark, averaging $1.3025/€ in April, it continued rising at the beginning of May after the ECB’s decision to lower its key policy rate. An increase of the monetary stimulus in the Euro-zone in the coming month, combined with the decision to lessen austerity and promote growth via fiscal measures should further support the euro. Despite the recent slight weakening of the US dollar in trade weighted baskets, it is forecast to remain strong, at least in the short term. However, developments will depend upon decisions regarding austerity measures and monetary policy in the Euro-zone and near-term decisions on US fiscal issues in Congress.

In nominal terms, the price of the OPEC Reference Basket fell by $5.39/b or 5.1% from $106.44/b in March to $101.05/b in April. In real terms, after accounting for inflation and currency fluctuations, the Basket price fell by 4.8% or $3.18/b to $63.21/b from $66.39/b (base June 2001=100). Over the same period, the US dollar fell by 0.1% against the import-weighted modified Geneva I + US dollar basket while inflation fell by 0.4%.