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Developing-country demand appears to have led the rebound in activity

The resurgence of industrial activity was strongest among developing countries. It partly reflected steady growth in China, but also a return to expanding output among many of the larger middle-income countries that had seen activity stagnate or decline in the second half of 2011 (for example India and Turkey), and a bounce back in activity levels in Thailand following last year’s flooding. Data through April are available for only a few countries, and show mixed trends. Growth in China has softened, while in Brazil  the contraction shows signs of ending. Box 1 and the industrial production appendix provide additional detail regarding recent developments in each of the six developing regions.

The firming of growth in the first four months of 2012 appears to have been mainly due to strengthening demand in developing countries. Developing-country import demand accelerated sharply in the fourth quarter of 2011, even as Euro Area import demand continued to decline (figure 7). And it was this boost in demand that fueled the uptick in the exports of both developing and developed economies.

Figure 7. Developing countries lead rebound in imports
Import volume growth, 3m/3m saar
Source: World Bank, Datastream.

The rebound partly reflects a sharp acceleration in developing country capital goods imports, which were expanding at an annualized rate of 35.6 percent (3m/3m, saar) during the three months ending January 2012 — versus a 3.7 percent  rate of decline in the third quarter of 2011. The increased demand was particularly supportive of the foreign sales of capital goods exporting countries like Germany, Japan and the United States and augurs well for future activity.

Figure 8. Outside the Euro Area, business sentiment picked up early in 2012
Index, >50 implies increased activity, <50 slowing growth

Source: World Bank, Markit and Haver Analytics.

Overall global trade, which was falling at a 12 percent annualized pace in November 2011 was growing at a 14 percent annualized pace during the first quarter. Even Euro Area imports, which had been falling at a 30 percent annualized pace in the fourth quarter returned to positive territory.

Business sentiment also picked up through April (figure 8), suggesting that growth was likely to continue — albeit at a more modest pace than during the pre-crisis period. Data for May, however, shows a marked downturn reflecting the dampening influence of the uptick in  financial market turmoil as well as evidence that the pace of expansion in the United States and China may be slowing. How durable this change in sentiment proves to be and its impact on investment expenditure will be a critical determinant of the strength of activity going forward (see following discussion of headwinds).