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The External Environment for Developing Countries May 2008 The World Bank Development Economics Prospects Group First quarter GDP growth surprised to the upside across the OECD... real GDP growth, percent saar 6 Q3-2007 Q4-2007 Q1-2008 4 2 0 United States Euro Area Japan ...but step-up in inflation may pressure growth globally in coming quarters U.S. CPI, Euro Area HICP, median developing-country CPI, ch% y/y 10.0 8.0 Developing countries 6.0 4.0 United States 2.0 Euro Area 0.0 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Source: National Sources through Thomson/Datastream. Industrial countries U.S. GDP for Q1-2008 surprises to the upside at 0.9% (saar) growth of real GDP, and contributions to growth in percentage points 6 Net exports Change in Stocks Government Consumption Fixed Investment 4.9 4 2 0.6 0.9 Q4-2007 Q1-2008 0 -2 -4 Q3-2007 Source: Department of Commerce and DECPG calculations. Households reticent to spend as wage growth slows... confidence ebbs 12 Personal income and consumption expenditures, ch% saar 10 Personal income 8 Personal consumption expenditure 6 4 2 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Source: U.S. Department of Commerce. U.S. inflation underpinned by food, fuels, and imports under a sliding dollar 15.0 Headline CPI, PPI- and Import price indexes, ch% 3mma y/y Import price 12.5 10.0 PPI 7.5 5.0 CPI 2.5 0.0 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Source: U.S. Department of Commerce. Japan Q1-GDP surprises to the upside (3.3%) on exports and consumption growth of real GDP, and contributions to growth in percentage points 6 5 4 Net exports Fixed Investment Consumption Government Change in Stocks 3 2 3.3 2.6 1.1 1 0 -1 -2 Q3-2007 Q4-2007 Q1-2008 Source: Japan Cabinet Office and DECPG calculations. Japan’s exports and production take a leg down in April 10.0 goods export volumes [R], IP manufacturing [L], ch% saar Exports [R] 25 20 7.5 15 5.0 10 2.5 5 0 0.0 Production [L] -2.5 -5 -10 -5.0 -15 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Source: Cabinet Office-- Thomson/Datastream. Japan’s manufacturers and households turn more pessimistic Tankan business conditions [left]; Tokyo consumer confidence [right] 10 8 Consumer confidence (right) 50.0 47.5 5 45.0 3 42.5 0 40.0 -3 Tankan (left) -5 37.5 35.0 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Source: Bank of Japan and Cabinet Office. Euro Area Q1-GDP: powered by investment and growth in Germany growth of real GDP, and contributions to growth in percentage points 5 4 3 2.6 2 Net exports Change in Stocks Fixed Investment Government Consumption 3.2 1.2 1 0 -1 Q3-2007 Q4-2007 Q1-2008 Source: Eurostat and DECPG calculations. European consumer spending continues in the doldrums through April retail sales volumes, ch% 3mma year over year 6 4 2 0 -2 -4 -6 -8 Jan-07 Mar-07 May-07 Euro Area Jul-07 Sep-07 Germany Nov-07 France Jan-08 Mar-08 Italy Source: Eurostat through Thomson/Datastream. HICP near record highs pushed by energy costs 4.0 HICP [left]; HICP energy [right], ch% year on year 12 10 3.5 HICP Energy [R] 3.0 8 6 2.5 HICP [L] 2.0 4 2 1.5 0 1.0 -2 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 Source: Eurostat through Thomson/Datastream. Industrial production US industrial production resilient in the first quarter... but growth is softening industrial production 7 Forecast Old Forecast Y/Y Q/Q, saar 4 1 -2 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 Source: World Bank, DECPG. May-08 Sep-08 Weaker growth in Euro Area hits countries that export to the Zone industrial production, year-on-year percent change 20 Forecast Czech Republic 15 10 5 Turkey 0 Hungary -5 -10 Jan06 Apr06 Jul06 Oct06 Jan07 Apr07 Jul07 Oct07 Source: Thomson/Datastream. Jan08 Apr08 Jul08 Downturn in Chinese industrial production as export growth eases real IP (q/q saar) and exports (3m/3m, oya ) 30 40 Production 25 35 Exports 20 30 15 25 10 20 5 0 15 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Source: Thomson/Datastream. Jan-08 Apr-08 International trade Indo-Sino trade continues on rapid growth course goods exports: millions U.S. dollars 2500 China exports to India 2000 1500 1000 India exports to China 500 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Source: U.N. COMTRADE Database through WITS. Chinese yuan continues to appreciate against the U.S. dollar in real terms real bilateral exchange rates, ch% year-on-year 15 10 5 Real yuan / USD XR 0 -5 -10 -15 Real yuan / Euro XR -20 -25 -30 2001M1 2002M1 2003M1 2004M1 2005M1 2006M1 2007M1 2008M1 Source: Thomson/Datastream, DECPG calculations. Euro Area exports make some headway despite strength of the euro dollar per euro [L]; Euro Zone export volume [R], ch% saar 1.60 28 Euro Area Exports [R] 1.50 21 1.40 14 1.30 7 1.20 0 Dollar per Euro [L] 1.10 2005M1 -7 2005M7 2006M1 2006M7 2007M1 2007M7 2008M1 Source: Eurostat and Thomson/Datastream. Oil prices Oil prices soar on expectations of tight markets $/bbl million bbl 130 2800 OECD stocks [R] 120 110 2700 100 90 80 2600 70 60 WB Oil price [L scale] 50 2500 40 30 Jan-04 2400 Jan-05 Jan-06 Jan-07 Jan-08 Source: IEA and DECPG Commodities Group. Distillate prices rise on ultra-low sulfur diesel constraints $/bbl 40 Price differentials relative to crude 30 Distillate 20 Gasoline 10 Crude (WTI) 0 -10 Jan-06 Jan-07 Dec-07 Source: Datastream and DECPG Commodities Group. WTI Futures Prices - NYMEX Monthly contract prices to Dec 2013* on select dates in 2007-08 $/bbl 140 130 May 21 2008 120 110 Apr 30 2008 100 Mar 31 2008 90 Dec 31 2007 80 70 Aug 15 2007 60 Jan 16 2007 50 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 * No monthly futures prices for 2013 for contracts trading before Nov 07 Dec-13 Non-oil commodity prices Rice prices surge on policy decisions resulting from fear of shortages c/bushel 1400 $/ton 1100 Wheat 1200 1000 900 800 1000 700 600 800 500 400 600 300 Rice 400 Jan-06 200 Jan-07 Jan-08 Source: Datastream and DECPG Commodities Group. Copper prices remain firm on low stocks and supply problems ‘000 tons $/ton Copper price 9000 225 200 8000 175 7000 150 6000 125 100 5000 LME stocks 75 4000 3000 Jan-05 50 25 Jan-06 Jan-07 Jan-08 Source: LME and DECPG Commodities Group. Freight rates rise on strong demand for bulk materials and port congestion 12000 Baltic dry freight index 10000 8000 6000 4000 2000 0 Jan-05 Jan-06 Jan-07 Jan-08 Source: Datastream and DECPG Commodities Group. International Finance Bank lending falls sharply in April Gross capital flows to emerging markets $ billion 2006 2007 Q1 Total Total 2008 Q1 Total Q1 Jan Feb Mar Apr 96 494 166 683 113 35 35 44 41 Bonds 42 137 58 146 14 7 4 3 13 Banks 39 246 81 343 80 21 28 30 16 Equity 15 111 26 194 20 6 3 11 13 23 116 38 157 18 9 4 5 13 Bonds 14 41 20 45 5 4 0 1 5 E. Europe 36 179 81 252 38 6 19 13 14 Bonds 17 64 28 64 5 1 3 1 7 25 153 30 213 47 18 8 20 11 8 19 8 23 3 3 0 0 0 12 45 16 60 11 2 4 5 3 Lat. America Asia Bonds Others Source: DECPG Finance Team. Trading in EM debt continues decline in 2008 Emerging Market debt trading volume in billions U.S. dollars 1200 1000 Eurobonds Local market instruments 800 600 400 200 0 Q1 01 Q4 01 Q3 02 Q2 03 Q1 04 Q4 04 Q3 05 Q2 06 Q1 07 Source: EMTA and and DECPG calculations. Q4 07 Emerging market equities: strong in May EM and high-income equity markets, returns by period (%) 8 6 4 2 0 -2 -4 Emerging markets -6 High-income markets -8 April May Source: Bloomberg. year to Date Currencies Dollar moves higher on expectations Fed rate cuts finished for near term USD per Euro (inverse) [Left] and Yen per USD [right] Jan-08 1.410 Feb-08 Mar-08 Apr-08 May-08 1.430 Jun-08 112 110 1.450 108 1.470 106 1.490 1.510 yen/USD USD/Euro (inverse) 1.530 104 102 1.550 100 1.570 1.590 98 1.610 96 Source: Thomson/Datastream. A move up in USD LIBOR lends some support to the greenback 5.0 LIBOR-6 months and EURIBOR 6-months, percent EURIBOR 4.5 4.0 3.5 3.0 USD LIBOR 2.5 2.0 Jan-08 Feb-08 Mar-08 May-08 Source: Datastream and DECPG calculations. Mixed developments for USD versus range of currencies over 2008 to date change early-June 2008 vs. December 2007, percent Pol zlty Czk Krna Brz real A$ Ch RMB EURO YEN Mex peso Rus Rbl Indo rpha C$ NEER Tur Lire Sterling Thai baht K won ZA Rand -15 Appreciation of Local Currency -10 -5 0 5 Source: Thomson/Datastream. 10 15 The External Environment for Developing Countries May 2008 The World Bank Development Economics Prospects Group