I ECONOMIC AND MONETARY DEVELOPMENTS I THE EXTERNAL ENVIRONMENT OF THE EURO AREA The recovery in the global economy is continuing, although its momentum has been moderating somewhat. The short-term global outlook is clouded by the waning support from the inventor)' cycle and from the fiscal stimuli. This is supported by the latest survey-based data, which also point to a slowdown in the pace of the global recovery. Global price pressures have remained fairly subdued on account of prevailing spare capacity, particularly in advanced economies, while inflationär}' pressures have been somewhat more pronounced in emerging economies. 1.1 DEVELOPMENTS IN THE WORLD ECONOMY The recovery in the global economy is conforming, although its momentum has been_ ffrorteral'iiig sumewhat. 1 he ihort-term global outlook is cloudecTBy the waning support from the inventory cycle and from the fiscal stimuli. Across regions, the pace of the recovery remains somewhat uneven. In _the major advanced economies, growth has remained moderate, as consumers and businesses in these countries Chart I XiobalfPMI -output repair their balance sheets in an environment oT weak "credit and labour markets as well as subdued consumer confidence. Growth Has also slowed recently in emerging economies -particularly inAsia, which had been leading the global recovery - thereby diminishing the risk of overheating in some countries. Box 1 reviews the growing importance of emerging market_ economies. The latest survey-based evidence substantiates the view that the global economic recovery has lost some momentum in recent months. The global Purchasing Managers' Index (PMI) for all-industry output stood at 52.6 in September, down from 53.9 in August, signalling that the global economy has continued to expand, albeit at a slower pace (see Chart 1). The momentum in both the manufacturing and the services sector continued to slow. The PMI for global employment was broadly unchanged at 50.4, suggesting generally very modest employment growth globally. This is broadly in line with the slow declineJB_fi^unemplc^giiail rate in OECD countries, which remained at the fairly Sigh leveToT?!5Vo in~~trrryTsee Chart 2T.---- ninhaljrir.p pressures have rerpained fairly subdued on account of prevailing spare capacity, "particularly in advanced economies. While the (diffusion index; seasonally adjusted; monthly data) —— PMI output; overall ..... PMI output: manufacturing .... PMI output: services % j i - » n 1 . •P I —, i i f \ . J i I T l I j — i i — 1 j i ■ j i j 1999 2001 Source: Markit. 2003 2005 2009 Chart 2 Internationa! price developments (monthly data; annual percentage changes) OECD consumer prices (all items) OECD consumer prices (all items excluding food and energy) T f 1 '• '*, V 1 i I \ j ! i I 1 ' 1999 2001 2003 2005 2007 200S Source: OECD. ECBH Monthly Bulletin} October W\6wBBtl PMI input price index increased to 57.6 in September, from 56.8 in August, signalling a rise in average input costs, it remains below the levels recorded prior to the global financial crisis. According to the latest available data, in the OECD countries, annual inflation declined moderately in recent months, from a peak of just over 2% in the first quarter of 2010, on average, to 1.5% in June, before edging up again to 1.6% in July and August. Excluding foodjnd energy, annual consumer price inflation has gradually declined and stood at )'.2% in August, unchanged from the previous month. In dynamic 'enielanjp^ contrasU iirilaTTonary pressures have been somewhat more pronounced? In some countries, such as Brazil and India, capacity constraints nave already exerted upward pressure on prices, while in China, overheating pressures have been diminishing somewhat. Finally, the rise in food prices over recentrnonths has had a more pronounced impact on inl1atioi~dcvdopmcnits in* emerging markets, given that food has a greater weight in the consumption baskets" '" THE GROWING IMPORTANCE OF EMERGING ECONOMIES Emerging economies^- which in 2009 accounted feSrl 82%/of the world's population - are id flaying anTncreasingry important role for the global econoTrry and for the euro area in particular. • Indeed, over tlrc^ ecoiKTmiu5~iir^mn!eTrT6~63% of LheTncrease in_ ? global output. -*——......- - - • — — * In terms of fcoonomic size, their share in global output has increased from less than 20% injhe__ early 1990s "to more than 30% at present, measured at market exchange rates. If the concent" ol purchasing power parity (PPP) is used - that is, taking account ofJifferences in the cost of living - the share of emer^jn^economies in world GDP is alread/^5?k almost 10 percentage points higher than in the early 1990s (Chart A). According to uttr+MF's World Economic Outlook, this share will surpassj^O"^ in 2013. Regarding individual economies, China andrlndra - accounting for around00%/aiw/18% , re§r3ectivejy_ofthj world's^popujaton, comparedwith about 5% each for the ^Atvr^rsl ntvUJkt UnitecT^tates - have now entered the circle of the largest economies in the world. In terms of market exchange rates, China is nowJhe_thjrd largesTeco'nonTy""behind"tb"e"61tirftetl States and the euj is already. In PPP tbf one-third of thN area, based on 2010 World Economic Outlook projections.(FhituKs ClDI1'level though only 43% at mark£_t_p/change rates. ia\is among the top five economies, with GDP amounting to more than e euro area. Using either method, the subsequent rjQsitions are dominate^ by the emerging world, including Brazil, Russia and Mexico (the exceptions being the UnitedTvmgdom andCanada) (QiartBX "~~ Emerging economies are very open to international trade, which is reflected in their growing share"m~world trade.'^ÖlTtnT^gortJide^the ecpjiqrnies' share has increase!] aroünT" 19% öf worTti exports in the early 1990s to close M35%) recently. On thefirnj the shareiras increased from 20% to 30% over the same penottr^ I this box adopts the definition of emerging market eeonomies given by the IMF. ECB Monthly Bulletin October 2010 Chart A Emerging economies' share in world GDP Chart B GOP of selected economies in 2010 relative to world GDP (percentages) (percentages) at market exchange rates at PPP exchange rates 50 45 4« 35 30 25 20 15 10 5 .0 r I I II 1980-84 1985-89 1990-94 1995-99 2000-04 2005-09 Source: IMF World Economic Outlook. at market exchange rates at PPP exchange rates ■ I *-* ■ ——*— 1 ! 1 I « i. 1« j 1 1 i IE 4L 4L It ll ; mil 1 1 United Slates 2 Euro area 3 China 4 Japan 5 United Kingdom 6 Brazil 7 Canada 8 Russia 8 9 9 India 10 Mexico Source: IMF World Economic Outlook. Emerging economfesTiave also made some significant progress in terms of financial developae^, liTparticular, the share~ofTEe~Wajor^merging economies' stock markets in world capitalisation increased from 7% in 1990 to 32% in 2009. This has been associated with considerable net private "portfolio inflows both prior to the global .financial crisis and - following a phase of temporary capital flow retrenchment, especially in the last quarter of 2008 and the first quarter of 2009 - during the subsequent recovery. Regarding economic links with advanced economies, the recent global crisis has confirmed that developments in emerging economies continue to depend significantly on advanced economies. Indeed, even though the shock stemmed from the advanced world, the median emerging economy suffered about as large a decline in output as the median advanced economy.2 Taking a historical perspective, however, it becomes clear that_emerging economies have been , less affected in the recent crisis thar/in the past, and have indeed even led the global recovery. EnleT^ingAsia - especially its largest economies - has evidenced a large degree ofjgsiljence to the global economic~downturn. InTEhfaa real GDP"growth declined only slightly, from 9.6% in 2008 S^o~^T%TnJ0fj24This is mainly because the Chinese authorities reacted promptly with a RMF" 4 trillion"(12% of GDP) stimulus package combined with a strongly expansionary monetary policy, which boosted infrastructure! investment and contributed to the resilience of private consumption. Another important factor was that the domestic value-added content of Chinese exports is relatively low owing to a large share of processing trade. As a result, falling exports implied almost equally ^laTlSglmports of intermediate goods and, thus, only a limited negative impact of net exports on GDP growth. Finally, owing to the still binding restrictions on inward andoirtw^djortfolio_ investments, banks' balancTsneets werenotseverely jimpactedbyTRT^IoT^rfinancial turmoil. FronTthe second quaTter of2009 onwards, private capital inflows regained pace, as did foreign" exchange reserves, which totalled USD 2.4 trillion in June 2010. 2 See "How Did Emerging Markets cope in the Crisis?", IMF, 2010. ECB Monthly Bulletin October 201(1 Turning to the importance of jbderging economies for the euro area, it should be highlighted that the share_af_emo~area exports (excluding mtra-euio atea tiade) tu_Aga increased from 19% in 2000lo~22%nn^"009 whereas exports to the United States decreasecTTForn 17% toT2% -JS^TTsame period. The sBare of China in total euro area exports increased from 2% in 2000 to ( 5.3"^in2009. E^ortltoRuss^ tlTaTnfoTTble^iCT^ same period, fium 1.8% to 3.9%, V^thgFeby exceeding exports to JapanHnTTimipTrussnrs share had been even higher in 2008 (5.0%), before the collapse in world trade. A similar trend can be identified for India, albeit on a much smaller scale, with this country accournmg i^r.7^,,^M^nTTarea exports in 2009" ' A further breakdown of euro area exports using quarterly data shows that China's share increased from 3.8% in the first quarter of 2007 to 6.2% in the second quarter of 2010. In nominal terms"" ~eura"area exports to China increased hy i4% between the firsfquarter of 200? and the second quarter 6T~2TTm I he Targesi share of this mcreasTcan he attributed to machinery and transport equipment - especially road vehicfeT More generally, while euro areatrrmrts have grown by 21.8% since their trough in the second quarter of 2009, more than a quarter of this increase can be attributed to exports to emerging Asia ajmost 10% to exports tcHralin Aiiiei'tcaTahd a filMer"'' 6%"to~exports to the Conimonwea+ttTo'Hndependent States, including Russia. Looking ahead, the importance of emerging economies for both global and euro area developments is likely to increase furtherover time. This is suggestedTy a'l I availabiriong-terrrP projections based on demographic trends and models of capital accumulation and production. UNITED STATES In the United States, the pace of recovery in economic activity moderated in the second quarter of 2010^ after having rebounded strongly in the previous two quarters. "According to the third estimate by the Bureau of Economic Analysis, annualised quarter-on-quarter real GDP growth was 1.7% (see Chart 3). GDP growth was supported bv business investment and government spending. Meanwhile, growth was dampened by a large negative contribution from net exports, owing to asharp acceleration in imports relative to that in exports. Recent data releases point to modest GDP growth in the third quarter. Industrial production rose at a slower pace in August than earlier this year, as the momentum from inventory accumulation waned. Looking ahead, survey-based indicators suggest a further weakening in the manufacturing sector. In the context of low consumer confidence and weak labour market conditions, personal consumption expenditure growth is expected to remain subdued. As regards price developments, annual CPI inflation declined to 1.1% in August 2010, from 1.2% in July. The energy index rose by 3.8%> year on year in August and, as in July, was the primary driver of headline inflation. Excluding food and energy, the annual rate of inflation remained at 0.9% in August, the lowest rate since 1966, reflecting the substantial slack in US product and labour markets. On 21 September the US Federal Open Market Committee (FOMC) decided to keep the target for the policy rate unchanged within a range of 0% to 0.25% and continued to anticipate that economic conditions were likely to warrant exceptionally low levels of the federal funds rate for an extended period. The FOMC also said that inflation was at levels somewhat below those it judges to be most consistent, over the longer run, with its mandate and that it was prepared to provide additional accommodation if needed to support the economic recovery and return inflation, over time, to levels consistent with its mandate. ECB Monthly Bulletin October 2010 ECONOMIC AND MONETARY DEVELOPMENTS The external environment of the euro area Chart 3 Main developments in major industrialised economies euro area ---- Uniied States Japan - United Kingdom Output growth11 Inflation rates2' (quarter-on-quarler percentage changes; quarterly data) (consumer prices; annual percentage changes; monthly data) 1999 2ÖÖ1' 2Ö03 2005' 2007 2ÖÖ9 "1999' 2001' 20oä' 2001' 2ÖÖ7 Sources: National data, BIS, Eurostat and ECB calculations. 1) Eurostat data are used tor the euro area and the United Kingdom; national data are used for the United States and japan. GDP figures have been seasonally adjusted. 2) HICP for the euro area and the United Kingdom; CP! for the United States and Japan. JAPAN In Japan, the economy continued to expand in the second quarter, albeit at a slower rate than in the first quarter of 20id AatarSfae, to the second preliminary data release by Japan's Cabinet Office, real GDP expanded by 0.4% Quarter on quarter in the second quarter. JjOHrtfa-^wus still lftEftfcly driven by exports, altnotrgtrllie pace of increase has started to moderate. On the domestic side, "the "main contribution came from non-residential investment, while private consumption was flat, reflecting the waning effect of the policy stimulus measures. Recent data releases point to ajjirfhf»r . moderation of activity. In particular, industrial output fell in August, reflecting the slowdown in export growth given the appreciation of the yen and a slowdown in global demand. The September Tankan survey revealed that, while firms' assessment of current conditions has improved somewhat, their outlook has deteriorated. Overall consumer price inflation remained negative in August (at -0.9% year on year), owing to the significant slack in the economy. CPI inflation excluding fresh food declined by 1.0%, while annual CPI inflation excluding fresh food and energy declined by 1.5%. On 15 September the Japanese authorities intervened in the foreign exchange market for the first time since March 2004 in order to curb the appreciation of the yen On 5 October the Bank of Japan decided to lower its target for the uncollateralised overnight rate to between 0.0% and 0.1%, from the previous level of 0.1%. At the same time, the Bank of Japan announced that it would examine the establishment, as a temporary measure, of a programme on its balance sheet to purchase various financial assets. UNITED KINGDOM In the United Kingdom, the economic recovery has continued. Real GDP increased by 1.2% quarter on quarter in the second quarter of 2010, after expanding by 0.4% in the first quarter. Growth was mainly driven by a rebound in private conj5urnption_and a continued accumulation of ixaorJiories in ECB Monthly Bulletin October 2010 the second quarter, while the contribution of net trade was rnL House prices continued their upward trend in year-on-year terms, although month on month they have declined in recent months. Looking ahead, inventory adjustments, the monetary stimulus, external demand and the past depreciation of the pound sterling should support economic activity. However, growth in domestic demand is expected to remain restrained by light credit conditions, household balance sheet adjustment and substantial fiscal tightening. Annual CPI inflation increased markedly at the beginning of 2010, peaking at 3.7% in April, but has moderated somewhat in recent months, standing al 3.1% in August. Looking ahead, the lagged effects of the depreciation of the pound sterling and the impact of the VAT rate increase in January 2011 are expected to exert upward pressure on consumer prices. In recent quarters the Bank of England's Monetary Policy Committee has maintained the official Bank Rate paid on commercial bank reserves at 0.5%. The Committee has also continued to vote to maintain the stock of asset purchases financed by the issuance of central bank reserves at GBP 200 billion. OTHER EUROPEAN COUNTRIES On balance, the economic situation continued to improve in the second quarter in other non-euro area iTu countries, while inflationary "developments" were mixed. Keal ub\' increased by 1.7% and 1.9% quarter on quarter in the second quarter of 2010 in Denmark and Sweden respectively, suggesting that the recovery has gained pace in both countries. In Denmark, HI CP inflation has been stable in recent months, hovering around 2%, while it has followed a decreasing trend in Sweden. In August 2010 annual HICP inflation stood at 2.3% in Denmark and 1.1% in Sweden. Overall, the largest central and eastern European EU countries continue to recover, although econojnic growfhiuLs beeTT"vol^lIi7eZIii recent guartersTTlTFrecoveiryconlTnul^sto be supported by external demand and inventory accumulation. Domestic demand has remained fairly subdued owing to weak labour and credit market conditions as well as fiscal restraint in some countries. Recent confidence indicators and industrial production and trade data point to the continuation of an external demand-driveri recovery in all countries, with the exception of Romania. In August 2010 InflaUQjTJjtoo^^ the Czech Republic an3^^%)in Poland. In Hungary, inflation declined markedly tp 3.6% in August 2010, in line with tneTSise effect related to last year's tax hike. In Romania, irTfTation hovered slightly above 4% in the months prior to July, before increasing to 7.6% in August following the recent VAT hike. EMERGING ASIA In emerging Asia economic activity remains buoyant, albeit moderating slightly. The latest available data for industrial production and export indicators exhibit marginal1^/Jnwpr gmwf.h t-qjgs compared with the secomjjjiiart.er, whereas domestic private demand is increasingly contributing to economic growth in a number of countries, inflation^r^pres's'res 'have been somewhat more pronounced owing tolhe favourable economic conditions, but also as a result of rebounding commodity prices. verall economic activity remained strong_jn the summer months, despite the gradual of fiscal stimuli. Annual year-on-year growth rates of both investment and industrial production picked up in August. Retail sales have also risen, Jed 1"lv-ve|licJ^|||^lleR August data indicate a further shift in the composition of investment, away from public stimulus-related infrastructure investment and towards private sector investment. Measures to tighten activity in the property sector adopted in April had only a limited negative impact on actual construction growth and were complemented by additional fine-tuninj^jtagasures in late September. Despite a continued deceleration, export growth remained strong ai 34°A in year-on-year terms in August, ECB Monthly Bulletin October 2010 and the monthly trade surplus was close to pre-crisis levels for the fourth consecutive month. In the first eight months of 2010 the cumulated trade surplus was USD 104.5 billion, which is 15.4% below that of the same period last year. CP! inflation increased to 3.5% year on year in August (from 3.3% in July), led by an increase in food prices. LATIN AMERICA Economic activity in Latin America continued to advance at a rapid pace in the second quarter. However, recent higfr^requenev" indicators point towards a moderation iii growth. At the same time, inflationary pressures have remained broadly stable. In ^pazil, real GDP^grew at an annual rate of 8.7% in the second quarter_of_2010, slightly below the 9.0%i growth rate recorded llTthe first quarter. Industrial production in July, meanwhile, stood 8.7%) higher than a year earlier, down from 11.1% in June. In August consumer price inflation stoocrat4".4% on an annual basis, broadly unchanged from the previous month. Argentina also recorded strong levels of economic activity during the second quarter, with real OOP expanding by 9.2% on an annual basis. At the same time, consumer price inflation continued to record double-digit rates on/an annual basis, reaching 11.1% in August, broadly unchanged compared with July. Finally, ki rvfexjcxyiftdustrial production grew byJU&c. in July, after having increased by 8.3% in June. Constmier price inflation was broadly unchanged in August as compared with July, standing at an annual rate of 3.7%. 1.2 COMMODITY MARKETS ^foil pricesj,recovered during September and early October. Brent crude oil prices stood at /USD 83.9 per barrel on 6 October, which is 5.8% higher" than at the beginning of the year (see Chart 4). Looking ahead, market participants expect higher oil prices in the medium term, with futures contracts for December 2012 trading at around USD 90 per barrel. Looking at fundamentals, oil demand is growing robustly in non-OECD countries and recovering steadily in OECD countries, in particular in the United States. According to the International Energy Agency, global oil demand is expected to rise by 1.5% in 2011. On the supply side, oil production capacity remains ample, partially owing to increases in non-OPEC output. While high levels of inventories have dampened the demand-side pressures on oil prices in recent months, some signs of an inventory drawdown have started to materialise, which may hint at tighter market conditions in the future. The (prices of non-energy"c^M£5SJjesJncreased _signjficantly in SeptemberiF^od prices continued ' to increase strongly, driven in particular by jnaize. and^sugar. Price increases were due to a combination of ro^tst demand, a reduced suppjx owing to adyersfe^eather^conditions and low als0 reached—tecariL, inventories. tton _has wing to a prices, mainly-Owing to a7Stronj recovery "demand ancT tight supply.^MejaD^jges have also increased, driven in partici^ " " ~ 'Charts Main developments sin commodity prices Brent crude oil (USD/barrel; left-hand scale) non-energy commodities (USD; index: 2000 = right-hand scale) 100; 150 140 130 120 110 100 90 80 70 60 50 40 30 Sources: Bloomberg and HWW1. \ i !•; ./• V° j * -- h **'m 4JPV ** _R ■* y y j l ! 2008 i 1 i 2009 20 i 10 300 285 270 255 240 225 210 195 180 165 150 135 120 ECB Monthly Bulletin October 2010 and riicjsel^ln aggregate terms, the price index for non-energy commodities (denominated in US dollars) was 20,8% higher at the end of September than at the beginning of the year. 1.3 OUTLOOK FOR THE EXTERNAL ENVIRONMENT Looking ahead, the latest survey and indicator-based information suggests that thej£cai££rxin the global economy is continuing, although thg, momentum has been moderating somewhat, In July the OECD composite leading indicator decreased slightly to 103.1, albeit remaining above its long-term average (see Chart 5). This development suggests that the global recovery_may have passed its peak in the first half of this year. SomeTurtjw global economic expansion in the near uiiiuv is also suggested by the lower inflow of new Chart 5 OECD composite leading indicators (monthly data; amplitude-adjusted) - OECD ..... emerging markets ' i-rrrfrrrfrrrfrrrfrrrfrrrfrrrfrrrfrrrfrrr]-rrrfr mi 2001 2003 2005 2007 2009 100 Source: OF.C'O Note: The emerging market indicator is a weighted average of the composite leading indicators for Brazil, Russia and China. orders, as indicated by PMI data for September. The overall new orders index declined to 52.6 in September, from 55.2 on average in the second quarter. New business growth slowed mainly in the manufacturing sector, while the slowdown of growth in new orders in the services sector was less pronounced. In fact, the services sector new orders index picked up slightly in September, as compared with August. Box 2 briefly presents trends in world trade following the financial crisis. In an environment of uncertainty, tjie_iisks to globaLactivity are slightly/tilted to the downside. On the upside, trade may continue to grow faster than expected. On the d/iwnside. cojicmts^amaki relatinj^jxjjhejernergence oi\ renewed tensions in financial markets, [penewed increases moHjttd other commodkyjjrices, ana protectionist pressures, as well as the possibility of a disorderly 'correction of global imbalances. _ TRENDS IN WORLD TRADE FOLLOWING THE FINANCIAL CRISIS A striking feature of the recent financial crisis was the collapse in world trade, which was highly synchronised across countries and regions.' Between the third quarter of 2008 and the second"* quarter of 2009 global trade volumes declined by approximatelfl^V]and, thus, much more steeply than worldGTTrVv^hi^h^fell by around 2% over tne same period (see Chart A). This partly reflects the fact that global trade is more cyclical than global economic activity, because the more "trade-intensive*TiDT> components - such as private investment, durable goods 4 consumption and inventories - experience larger swings than non-traded goods and services over the business cycle. The increasecT presence of global supply chains in recent years may have further amplified this effect. 1 For more details, see the article entitled "Recent developments in globaj and euro area trade". Monthly Bulletin, ECB, August 2010. ECB Monthly Bulletin October 2010 Following this severe downturn, world trade recorded a vigorous rebound which started in the second half of 2009 and continued well into the first half oJ^g&LO (see Chart A). By the second quarterof 20jü>global trad£jTadrecoyered by more thafT 14%^fjom its trough, although it stilT remained somewhat below the level recorded in the thftoxuiflrtef of 2008 beiore tire intensification of the financial crisis. ~~ ~ ' ■--* The pace of the recovery in global trade seems to have moderated in the second and third quarters"oFthis year.'Monthly data from the Centrääl Planbureau (the Netherlands Bureau for" Economic Policy Analysis) - which provides timely data on global trade in goods - suggest that the momentum of growth in global trade in goods has slowed, declining fpm 5.4% in the first quarter of 2010 to' 2.8% in July (on a three-month-on-three-month basis). Recent survey-based data point to a further slowdown in growth in the third quarter. The new export orders component of the global Purchasing Managers' Index (fMi), which is strongly correlated with developments in global trade, has declined steadily over thepastjew months. In September it stood at 52.1, significantly below the peak ot 58.5 recorded in April (see Chart B). At the same time, it remained above the expansion/contraction threshold of 50, suggesting that global trade is continuing to expand, although at a more subdued rate than in the first half of the year. supported global trade. As these measures are being phased out and ernments are embarking on a process/pf fiscal consolidation, the previously supportive effects on trade are unwinding. Moreover, jir^ventory dynamics magnified both the downturn and the subsequent upturn in gfobal trade. More recently, however, inventories have been approaching levels in line with historical averages, which implies that restocking is likely to have a less Chart A World trade in goods and services and world GDP TChart IB World trade in goods and the new export orders component of the global PMI gSHHBBBHSHni (index: Ql 2007 = 100; quarterly data) (three-month-on-three-month percentage changes; diffusion index) m world trade (left-hand scale) ..... new export orders index (right-hand scale) 10 105 100 Hi,-.. 95 90 urn J 2007 2008 2009 2010 Jan. July 2008 Jan. 70 60 40 30 20 July ' 2009 Jan. July 2010 Source: ECB. Note: The latest observation refers to the second quarter of 2010. Sources: Centraal Planbureau and Markit. Note: The latest observation refers to September 2Q10 for the export orders component of the Purchasing Managers' Index (PMI) and July 2010 for world trade. Thg\yecent trends in and near-term prospects for global trade are affected by the unwinding of / transitory factors. During the financial crisis, fiscal stimulus measures - most prominently ^ageschemes ECB Monthly Bulletin October 2010 pronounced effect on global trade in the near term. Finally, l^e/strong rebound in global trade_ may also reflect a technical correction following the extremely^harp fall during the crisis. Looking ahead, trade levels are likely to remain below their pre-crisis trajectory for some time to come. tF/irst, trade-intensAe sectors are credit-sensitive. As lending standards are unlikely to return to pre-crisis standards in the near future, persistent repercussions on the level of trade cannot be ruled out. iSecond, in several advanced economies, demand for non-tradablc goods has increased somewFtat relative to demand for durable goods, as consumers repair their balance sheets and thereby tend to reduce their expenditure on durable*goods more than their spending on services.2 This is also likely to have a negative impact on global trade. In the longer term^vorld_ trade growth can be expected lo continue to outpace growthm economic activity, as emerging economies continue to integrate rapidlyHnto the world economy. Overall, the vigorous recovery in global trade in recent quarters was partly a te^lrmcajj^orrection and is waning now, as suggested by recent survey data releases. Meanwhijc, therei£ little evidence that global trade integration hasbeenj»ndejE^ crisi,s^ While tight credit standards and balance sheet restructuring are likely to dampen trade growth for some time to \ come, in the longer term world trade prospects will large!yc^end_on the outlook for global \ economic activity and the ongoing globalisation process. 2 See also Chapter 4 entitled "Do financial crises have lasting effects on trade?", World Economic Outlook, IMF, October 2010. ECB Monthly Bulletin October 2010