Oil prices remain very volatile

Global economic activity continued to be robust despite economic slow-down in the United States. Global growth is increasingly being supported by buoyant activity in emerging economies. In particular, Asia has remained the main engine of global growth as the larger countries in the region continue to record very high growth rates.

In the United States, quarterly annualized growth rate of real GDP rebounded to 4.0 percent in the second quarter of 2007 (from March to June 2007) compared to just 0.6 percent in the first quarter. A rebound in the contributions from net trade, inventories and government consumption as well as a pickup in non- residential investment was the major factor for the increase in real GDP growth. Looking ahead, assuming that the negative effects of the housing market on consumption and residential investment would continue, the US economy is expected to expand at a rate below trend in the second half of 2007.

Global data shows that in the second quarter of 2007, real GDP growth in Japan was 0.1 percent on a quarterly basis compared to 0.8 percent in the preceding quarter. The decline in growth during the second quarter was due to a slowdown in private consumption and private residential investment. However, the outlook for the Japanese economy remains favorable. Real GDP growth is expected to be supported by both domestic demand and net exports.

Euro area real GDP growth in the second quarter moderated to 0.3 percent quarter on quarter, compared with 0.7 percent in the previous quarter. However, it is expected that Euro area real GDP will continue to grow at sustained rates during the remainder of 2007. GDP growth has remained robust and stable in the United Kingdom, reaching 0.8 percent (quarter on quarter) in the second quarter. Growth in the second quarter was driven by private consumption, whereas investment and export growth declined, and the contribution of net exports was negative. In the second half of 2007, the pace of quarterly GDP growth is expected to decelerate moderately.

In emerging Asia, economic activity has continued to expand at a sustained pace, especially in the largest economies of the region. In China, lower growth in industrial production and investment in July seem to suggest that economic activity has moderated somewhat after growing vigorously in the first half of 2007. China’s trade surplus grew to a cumulative USD 136.8 billion in the first seven months of 2007, an increase of 81% compared with the same period in 2006. Its foreign exchange reserves also continued to rise reaching USD 1.33 trillion at end-June 2007. In South Korea, real GDP grew at an annual rate of 5.0 percent in the second quarter of 2007, up from 4.0 percent in the first quarter while in India it grew by 9.3 percent. Overall prospects remain favorable for emerging Asia, underpinned by steady growth in domestic demand, as well as robust growth in exports.

According to latest reports economic activity has remained sustained overall in Latin America although there is some heterogeneity in the growth performances of the major economies. In Brazil, industrial production rose at an average annual rate of 5.8 percent in the second quarter of 2007 compared with 3.8 percent in the first quarter. Meanwhile annual industrial production growth in Argentina declined to 6.0 percent in the second quarter from 6.7 percent in the first quarter. In July 2007, it further declined to 2.3 percent. In Mexico, real GDP growth on annual basis rose from 2.6 percent in the first quarter to 2.8 percent in the second quarter. The outlook for Latin America as a whole continues to be favorable, with domestic demand expected to remain the main engine of growth.

For the third year in a row, sub-Saharan Africa (SSA) recorded an average growth rate of 5.7 percent in 2006 on account of good performance by oil producing as well as oil importing countries. The short-term economic outlook for sub-Saharan Africa remains very positive, against the backdrop of strong global growth, continued progress in cementing macroeconomic stability, the beneficial impact of debt relief, increased capital inflows, rising oil production in a number of countries, and strong demand for non-fuel commodities. Real GDP growth is expected to accelerate to 6.1 percent in 2007.

Global price developments continued to be significantly affected by changes in commodity prices. In the United States, annual consumer price inflation averaged 2.6% in the six months from February to July 2007. Recently, however, a slowdown in the annual rate of increase in energy prices has led to a slight fall in inflation rates with annual CPI inflation declining to 2.4% in July 2007, from 2.7% in the previous month. Meanwhile, inflation has remained subdued in Japan where consumer price inflation on annual basis was zero in July 2007 compared to -0.2 percent in June.

In the Euro area, annual HICP inflation was 1.8% in August 2007, remaining unchanged from its level of the previous month. HICP inflation declined gradually to 1.9 percent in July 2007 in the United Kingdom after peaking at 3.1 percent in March 2007. Inflationary pressures remained broadly stable in the large economies of emerging Asia except China. Consumer price inflation in China reached 5.6 percent in July 2007, mostly driven by rapidly rising food prices while in South Korea annual consumer price inflation declined to 2.0 percent in August 2007. Inflation also continued to decline in India reaching 4.0 percent in August.

Looking at Latin American economies, annual consumer price inflation in Brazil increased to 3.7 percent in July 2007, after remaining stable in the first quarter of 2007. In Argentina, meanwhile, annual consumer price inflation declined in the second quarter to an average of 8.8 percent. In Mexico, inflation has remained relatively stable since the beginning of the year and stood at 4.1 percent in July 2007.

Oil prices remained very volatile during the first eight months of 2007. Prices were persistently increasing until July 2007 after which they declined substantially in August. The price of Brent crude oil reached a pick of USD 79.09 per barrel on July 20, 2007. The fall in oil prices in August were due to concerns over the potential effects of the global financial turmoil on the global economy and the possibility of dampening effects on energy demand. However, the price declines were limited as the Organization of the Petroleum Exporting Countries (OPEC) maintained production discipline, global oil demand remained very high and US oil inventories were low. Looking ahead, robust demand, limited crude oil supply growth and spare capacity are likely to keep oil prices at high levels and fairly sensitive to unexpected changes in the supply/demand balance.

Following a period of significant volatility, the prices of non-energy commodities fell substantially in August 2007, reflecting mainly a decline in the prices of industrial raw materials, particularly non-ferrous metals. Food prices, which had increased in recent months, also declined slightly in August in monthly terms, despite an increase in the prices of cereals. Nevertheless, the overall non-energy commodity price index (denominated in US dollars) was on average approximately 12% higher in August than a year earlier.

Coffee prices continued to rise with International Coffee Organization’s composite indicator price reaching 113.20 US cents per pound in September 2007 compared to 107.98 US cents/lb in August and 106.20 US cents/lb in July. This monthly average for September 2007 was the highest recorded since May 1998. (Compiled by Melaku Demissie)