Growing signs of an economic slowdown
The world economy may still be growing, but signs of an economic slowdown appear to be growing even faster.
Last week, Federal Reserve chairman Alan Greenspan gave a relatively upbeat assessment of the economy to the US Congress, saying: "There is no real underlying evidence of any cumulative weakness here."
In similar vein, International Monetary Fund (IMF) chief economist Dr Raghuram Rajan told The Straits Times after giving a lecture in Singapore that the IMF may upgrade its forecast for global growth of 4.6 percent this year.
Investors, however, appear to have other ideas, with stocks around the world continuing their recent run of poor performances last week.
In the US, the Nasdaq Composite Index closed the week at 1,849.28, a 1.8 percent weekly fall and a new low for the year. The Dow Jones Industrial Average also closed 1.8 percent lower at 9,962.36 for its fifth consecutive weekly loss, while the Standard & Poor's 500 fell 1.4 percent to 1,086.20, its sixth consecutive weekly loss.
US markets were hit by disappointing results from Microsoft and Coca-Cola last week. Microsoft reported an earnings increase of more than 80 percent for the last quarter, but warned of slowing sales. Coca-Cola's second-quarter sales were $5.97 billion, less than the consensus estimate of $6.13 billion and the smallest quarterly gain in more than two years.
European stocks dropped for a fifth straight week, the Dow Jones Stoxx 50 Index edging 0.3 percent lower to 2,600.42 and the Dow Jones Stoxx 600 Index falling 0.7 percent to 232.80.
Corporate news in Europe last week were discouraging. On Tuesday, Swiss reinsurer Converium reported an unexpected second-quarter loss and said it may ask shareholders for more money to boost capital eroded by US casualty claims. On Thursday, STMicroelectronics, Europe's biggest semiconductor maker, said profitability this quarter may be lower than in the previous period, hurt by the dollar's drop against the euro, price competition and accidents at some of its plants.
In Asia, the Nikkei 225 fell 2.2 percent to 11,187.33 last week, its third weekly drop in four. Most other Asian markets also fell, with Morgan Stanley Capital International's Asia-Pacific Index, which tracks more than 900 stocks, dropping 2.5 percent to 87.86 last week. China's Shanghai Composite Index was the biggest decliner among the region's markets, falling 3.4 percent.
Samsung Electronics saw its earnings outlook cut by HSBC Securities Asia and CLSA while Chartered Semiconductor, the world's third-biggest provider of made-to-order chips, cut its own sales forecast for the current quarter.
Recent economic news are also indicating a slowdown.
Inflation appears to be moderating. The US consumer price index increased 0.3 percent in June, but the core CPI -- which excludes food and energy costs -- rose just 0.1 percent. Inflation in the 12 euro nations slowed to 2.4 percent in June from 2.5 percent the month before.
China's consumer price index in June was up 5 percent from a year earlier. However, Guotai Junan Securities economist Zhou Keyu noted that that implied that the CPI fell by 0.7 percent from the month before.
Similarly, in Singapore, consumer prices rose 2.3 percent last month from a year ago, when the country was still suffering from the after-effects of Severe Acute Respiratory Syndrome (SARS). However, compared with May 2004, prices slipped 0.1 percent in June.
Privately owned housing starts in the US fell 8.5 percent in June to a seasonally adjusted rate of 1.802 million, the biggest decline since February last year. Building permits, an indicator of future housing activity, fell 8.2 percent to a seasonally adjusted annual rate of 1.924 million.
Forward indicators also portend a slowdown.
In the US, the Conference Board reported that its index of leading economic indicators for June fell 0.2 percent, the first decline since March 2003, although the trend may have been distorted by the closure of businesses for former-president Ronald Reagan's funeral.
In Singapore, the latest business activity survey by the Business Times and the National University of Singapore found companies less optimistic about business conditions for the next six months, with the net balance of optimistic companies falling 17 points to 37 percent.
US-based iSuppli Corp reported last week that chip inventories hit US$827 million at the end of the second quarter, way up from US$12 million three months earlier. Indeed, the rise in chip inventories has been known for some time already and has been weighing down the technology sector in particular and stocks in general (see "Terrible week for tech stocks").
Not that a slowdown at this juncture would be unexpected. Back at the beginning of the year, based on forecasts by many economists, I had expected "the US economy to slow, probably in the second half of 2004" (see "What's in store for 2004").
Rather, the question to ask is: Does the economy decelerate to its long-term growth rate and stabilise there, or is this the start of the next recession?
Last week, Federal Reserve chairman Alan Greenspan gave a relatively upbeat assessment of the economy to the US Congress, saying: "There is no real underlying evidence of any cumulative weakness here."
In similar vein, International Monetary Fund (IMF) chief economist Dr Raghuram Rajan told The Straits Times after giving a lecture in Singapore that the IMF may upgrade its forecast for global growth of 4.6 percent this year.
Investors, however, appear to have other ideas, with stocks around the world continuing their recent run of poor performances last week.
In the US, the Nasdaq Composite Index closed the week at 1,849.28, a 1.8 percent weekly fall and a new low for the year. The Dow Jones Industrial Average also closed 1.8 percent lower at 9,962.36 for its fifth consecutive weekly loss, while the Standard & Poor's 500 fell 1.4 percent to 1,086.20, its sixth consecutive weekly loss.
US markets were hit by disappointing results from Microsoft and Coca-Cola last week. Microsoft reported an earnings increase of more than 80 percent for the last quarter, but warned of slowing sales. Coca-Cola's second-quarter sales were $5.97 billion, less than the consensus estimate of $6.13 billion and the smallest quarterly gain in more than two years.
European stocks dropped for a fifth straight week, the Dow Jones Stoxx 50 Index edging 0.3 percent lower to 2,600.42 and the Dow Jones Stoxx 600 Index falling 0.7 percent to 232.80.
Corporate news in Europe last week were discouraging. On Tuesday, Swiss reinsurer Converium reported an unexpected second-quarter loss and said it may ask shareholders for more money to boost capital eroded by US casualty claims. On Thursday, STMicroelectronics, Europe's biggest semiconductor maker, said profitability this quarter may be lower than in the previous period, hurt by the dollar's drop against the euro, price competition and accidents at some of its plants.
In Asia, the Nikkei 225 fell 2.2 percent to 11,187.33 last week, its third weekly drop in four. Most other Asian markets also fell, with Morgan Stanley Capital International's Asia-Pacific Index, which tracks more than 900 stocks, dropping 2.5 percent to 87.86 last week. China's Shanghai Composite Index was the biggest decliner among the region's markets, falling 3.4 percent.
Samsung Electronics saw its earnings outlook cut by HSBC Securities Asia and CLSA while Chartered Semiconductor, the world's third-biggest provider of made-to-order chips, cut its own sales forecast for the current quarter.
Recent economic news are also indicating a slowdown.
Inflation appears to be moderating. The US consumer price index increased 0.3 percent in June, but the core CPI -- which excludes food and energy costs -- rose just 0.1 percent. Inflation in the 12 euro nations slowed to 2.4 percent in June from 2.5 percent the month before.
China's consumer price index in June was up 5 percent from a year earlier. However, Guotai Junan Securities economist Zhou Keyu noted that that implied that the CPI fell by 0.7 percent from the month before.
Similarly, in Singapore, consumer prices rose 2.3 percent last month from a year ago, when the country was still suffering from the after-effects of Severe Acute Respiratory Syndrome (SARS). However, compared with May 2004, prices slipped 0.1 percent in June.
Privately owned housing starts in the US fell 8.5 percent in June to a seasonally adjusted rate of 1.802 million, the biggest decline since February last year. Building permits, an indicator of future housing activity, fell 8.2 percent to a seasonally adjusted annual rate of 1.924 million.
Forward indicators also portend a slowdown.
In the US, the Conference Board reported that its index of leading economic indicators for June fell 0.2 percent, the first decline since March 2003, although the trend may have been distorted by the closure of businesses for former-president Ronald Reagan's funeral.
In Singapore, the latest business activity survey by the Business Times and the National University of Singapore found companies less optimistic about business conditions for the next six months, with the net balance of optimistic companies falling 17 points to 37 percent.
US-based iSuppli Corp reported last week that chip inventories hit US$827 million at the end of the second quarter, way up from US$12 million three months earlier. Indeed, the rise in chip inventories has been known for some time already and has been weighing down the technology sector in particular and stocks in general (see "Terrible week for tech stocks").
Not that a slowdown at this juncture would be unexpected. Back at the beginning of the year, based on forecasts by many economists, I had expected "the US economy to slow, probably in the second half of 2004" (see "What's in store for 2004").
Rather, the question to ask is: Does the economy decelerate to its long-term growth rate and stabilise there, or is this the start of the next recession?
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